Junior liens on property unable to be stripped in Chapter 7

New York mortgage lenders may have been relieved to learn that the U.S. Supreme Court recently reaffirmed a decision that Chapter 7 bankruptcy filers are not able to strip away a junior lien secured by real property. In its decision, issued on June 1, the Supreme Court held that federal bankruptcy laws as well as the earlier case prevented that from happening.

The Supreme Court had already held that a Chapter 7 debtor with a partially underwater junior mortgage could not have the junior lien stripped down to the value of the equity. In that case, Dewsnup v. Timm, the debtor’s junior lien was $120,000, while the value of the collateral was $39,000. That decision meant that a partially underwater lien could not be stripped down.

The recent case, Bank of America v. Caulkett, involved a debtor whose senior mortgage was more than the value of their property, making the junior mortgages held by Bank of America wholly underwater. In reaffirming its earlier decision, the Supreme Court indicated that Chapter 7 filers may not strip away wholly underwater liens secured by real property.

People interested in filing for Chapter 7 bankruptcy may want to seek a consultation with a bankruptcy attorney who may determine whether Chapter 7 is an appropriate solution for their individual financial situation. If a goal is to strip away a second mortgage from a home, Chapter 7 is most likely not going to be the best option. Chapter 7 bankruptcy may be able to help by discharging most of the debtor’s unsecured debts, however. The eligibility requirements for Chapter 7 include a means test which the attorney can describe.