Supreme Court Declares 2nd Liens Can't be Stripped in Chapter 7 Bankruptcy

Banks win out after the Supreme Court ruled on Monday. They state that homeowners cannot rid themselves of a second mortgage by filing for bankruptcy protection. All nine Supreme Court justices unanimously agreed that filing for Chapter 7 bankruptcy will not void a junior mortgage lien. This is when the amount owed by the senior lien surpasses the current amount of the collateral; if the Chapter 7 bankruptcy code allows the homeowner's claim and a lien secures it. Moreover, this ruling allows the junior lienholders to collect on loans in the event a debtor files bankruptcy. And, when they treat the subordinate loan as secured in bankruptcy proceedings.

Moreover, the ruling, which will mainly benefit commercial lenders, states that the bankruptcy courts don't have permission to “strip off” junior liens on a property; if the value on said property is in usage as collateral and is below the amount the homeowner owes to the principal lienholder. Bank of America v. Caulkett, where the Supreme Court ruled in favor of Bank of America and the new bankruptcy ruling originated, asserted that junior liens should not be considered as unsecured loans. This is because the bankruptcy code only “strips off” claims from property that are disallowed. And, because the Supreme Court’s ruling in Dewsnup v. Timm, disallowing “stripping down” of primary liens to the value of the underlying property, should extend to this case.

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