The United States Supreme Court recently came out with a decision that addresses a significant aspect of bankruptcy law – the treatment of junior mortgages in Chapter 7 bankruptcy cases. This ruling has far-reaching implications for homeowners facing financial distress. It allows a junior mortgage to remain in Chapter 7 bankruptcy proceedings even if the current value of the collateral is lower than the value of the first mortgage. Understanding the nuances of this Supreme Court ruling on junior mortgage in Chapter 7 bankruptcy is crucial for both homeowners and legal professionals navigating the complexities of bankruptcy law.

Background of Supreme Court Ruling on Junior Mortgage in Chapter 7 Bankruptcy

The latest decision stemmed from two cases that involved debtors who were similarly situated. One debtor owed $183,000 on a first mortgage and $47,000 on the second mortgage which were secured by the debtor’s home with a current market value of only $98,000. The second debtor’s home had a current market value of $78,000 and owed $135,000 on the first mortgage and $32,000 on the second mortgage.

When the value of the senior mortgage exceeds the current market value of the collateral property, the situation is referred to as being ‘partially underwater’. Having a second mortgage when a first mortgage that is larger than the value of the collateral property exists is further known as being ‘completely underwater.’

Being completely underwater, both borrowers filed a Chapter 7 bankruptcy case two years ago and sought to have the second mortgage liens held by the Bank of America voided. The bankruptcy courts discharged those debts and on appeal, the Court of Appeals affirmed those decisions. Dissatisfied with the outcome, the Bank of America raised the issue before the Supreme Court which reversed the lower courts.

Issue and Ruling Affecting Chapter 7 Bankruptcy Cases 

The Supreme Court dealt with the issue whether a debtor can void a second mortgage that is completely underwater or when the property is worth less than the first mortgage. The high court said that the second mortgage may not be voided if it is not a disallowed secured claim as defined under Section 502 of the Bankruptcy Code.

Both parties in the case agreed that Bank of America’s claims were not disallowed under that provision. Citing an earlier case (Dewsnup v. Timm) which was decided in 1992, the Supreme Court said that ‘secured claim’ mentioned in Sec. 506 referred to ‘a claim supported by a security interest in property regardless of whether the value of that property would be sufficient to cover the claim.’

The Need for Advice from a Bankruptcy Lawyer 

If your home is tied to senior and junior liens, you may have to consider this rule when you consider applying for Chapter 7 bankruptcy. Bankruptcy proceedings may offer relief to debtors but it is covered by hundreds of legal provisions with technical meanings and loopholes that a non-lawyer may miss.

In Vancouver, Washington, Attorney Erin McAleer has years of experience in Chapter 7 bankruptcy, helping individuals overcome their financial challenges through bankruptcy proceedings. He holds a Superb Rating of 10.0 from Avvo and is listed by the National Trial Lawyers as one of the top 40 attorneys in Washington under age 40.

We invite you to call us today at (360) 334-6277 to schedule a consultation and discuss your individual situation.