Supreme Court Rules Second Mortgages May Not Be Stripped Off in Chapter 7 Bankruptcy

Posted: July 28, 2015 By Krigel & Krigel

In a recent unanimous decision, the U.S. Supreme Court ruled that a homeowner cannot void the debt owed on a second mortgage in a Chapter 7 bankruptcy proceeding simply because the value of the home was less than the amount owed on the first mortgage.

Before getting into the specifics of this case, a short primer on bankruptcy proceedings is in order.

Chapter 7 v. Chapter 13 Bankruptcy

A Chapter 7 bankruptcy proceeding is considered a liquidation bankruptcy proceeding. The debtor’s goal is to discharge unsecured debts (such as credit cards and medical bills). However, certain debts are not discharged, such as car payments for vehicles you intend to keep, student loans, recent taxes, and unpaid child support among others.

On the other hand, a Chapter 13 bankruptcy proceeding is considered a reorganization. The debtor’s goal is to create a repayment plan so they can pay off their debts (or a portion of their debts) over a period of time. Additionally, under Chapter 13, some debtors can strip away second mortgages when the value of their home is less than the amount owed on a first mortgage (learn more about Chapter 13 bankruptcy in our prior post).  A Chapter 13 is also a good tool to help you catch up on debts you have fallen behind on- such as car payments, mortgage payments, or tax debt- over a period of three to five years.

Lien Stripping in Chapter 7 Bankruptcy Cases

In the recent Supreme Court case the debtors filed a Chapter 7 bankruptcy proceeding seeking to strip the debt on a second mortgage because the value of their home was less than the amount due on the first mortgage. Such an option is sometimes available in a Chapter 13 proceeding, but this was a Chapter 7 liquidation proceeding.

The Bankruptcy Court, District Court, and the 11th Circuit Court of Appeals all agreed with the homeowners and allowed the homeowners to strip the second mortgage and make it an unsecured debt (meaning it would no longer be secured by the home itself and would be discharged).

However, the Supreme Court disagreed and held that, even though the value of the security (in this case, the house) was lower than the amount owed, the debt was still secured by the home. Consequently, the court declined to strip the second mortgage.

What Should You Do?

If you’ve found yourself in a situation where you cannot afford to pay your debts, specifically one or more home mortgages, bankruptcy may be able to help.

Even though you cannot strip a second mortgage lien in Chapter 7, you may be able to in a Chapter 13 bankruptcy, depending on the facts of your situation. Of course, the specifics of each case are unique and an experienced bankruptcy attorney can help you determine whether bankruptcy can help you.

If you are experiencing any of these issues or another financial problem and you are curious if bankruptcy can help you, then be sure to contact one of our Bankruptcy Attorneys today.


Image: Thinkstock/Joe Ravi
*This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions.

« « Previous: Divorce Law 101 (Part Two)
Next: EEOC Rules Discrimination of LGBT Workers Prohibited Under Title VII » »