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Second mortgage stripping still allowed in Chapter 13 bankruptcy

Recent news reports are incomplete. The Supreme Court ruled that an underwater second mortgage cannot be stripped in a Chapter 7 personal bankruptcy. It is still allowed in a Chapter 13 filing.

The media recently carried a report on the June 1, 2015 Supreme Court ruling – Bank of America v. Caulkett. The respondents argued that they should be allowed to void a second mortgage which was “underwater” (more on that later) in their Chapter 7 bankruptcy filings. The Court found for the Bank.

But the news reports are incomplete, if not inaccurate, because the ruling applies only to Chapter 7 bankruptcies. “Lien stripping” (as it’s often termed), is still allowed in a Chapter 13 (reorganization) bankruptcy.

Some background:

•  High court rulings are typically very narrow in scope to prevent broad interpretations. Unless something is specifically mentioned, it is not covered. In this case the Supreme Court specifically mentioned only “Chapter 7” bankruptcy. The justices did not say this ruling applies to Chapter 13.

•  An “underwater mortgage” results when the amount owing on the first mortgage is greater than the value of the property. Chapter 13 operates differently than Chapter 7, allowing underwater liens to be stripped off in Chapter 13.

•  In the Eastern District of Virginia, Chapter 7 has not been used to strip off underwater liens. It has been understood that lien stripping is done in Chapter 13 exclusively. Essentially, nothing has changed for us, or our clients, because of the Supreme Court ruling.

•  Lien stripping is involved in a small, but significant, number of Chapter 13 filings in our jurisdiction. It can make a huge difference for our clients because it can discharge a large chunk of debt all at once.

•  The media’s incomplete story caused no small amount of angst among our Chapter 13 filers who were counting on lien stripping to discharge their second  mortgage. Fortunately we were able to positively address their concerns.

The bottom line:

•  If the first mortgage is “underwater,” the second mortgage may be eligible to be stripped off in a Chapter 13 bankruptcy filing, but not a Chapter 7 filing. A skilled, experienced Boleman Law attorney can advise clients about this during a free consultation.

•  Lien stripping is just one of the many advantages of a Chapter 13 bankruptcy filing. Boleman Law attorneys can outline many more depending on the individual situation.

•  Personal bankruptcy law is complex and nuanced. Boleman Law, Virginia’s largest consumer bankruptcy law firm, is always available to provide attributed comment and direction on bankruptcy issues for reporters and editors. At BolemanLaw.com there is a wealth of information just a click away.

At Boleman Law everyone receives a free consultation with a Boleman Law bankruptcy attorney. Boleman Law is the bankruptcy specialist. Since 1991 we have helped more than 106,000 Virginians regain their financial health.

We will help you.