On June 1, the Supreme Court ruled that a debtor could not void a junior lien through a Chapter 7 bankruptcy. This reaffirmed a ruling from a 1992 Supreme Court case that said a debtor could not strip down a partially underwater mortgage. In the 2015 case, it was initially decided by an appellate court that since the debtors were completely underwater, the law allowed a junior lien to be eliminated through Chapter 7 bankruptcy.
Bank of America, the lender in the case, appealed that ruling. The debtors in the case were not disputing that the lender had issued a valid loan and had a real claim to the property. It was also noted that the debtors were not seeking to overturn the 1992 decision. Although the debtors asked to limit that precedent to partially underwater situations, the Supreme Court denied that request saying that it would create a problematic and odd statutory framework.
The court’s ruling means that the holder of a junior lien could maintain its claim on collateral in a Chapter 7 bankruptcy case regardless of the collateral’s value. However, it is important to note that debtors may still be able to strip down junior liens through Chapter 11 bankruptcy, which occurs when a business wishes to reorganize its debts.
Going through a consumer bankruptcy under Chapter 7 may allow debtors to have unsecured debts discharged in a matter of weeks. This could allow them a fresh financial start and put an end to harassing creditor phone calls or emails. There are eligibility and other requirements associated with Chapter 7 that an experienced attorney will explain as part of an examination of debt relief alternatives that may be available to a particular client.