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

The Supreme Court ruled in favor of Bank of America to stop second lien stripping in Chapter 7 bankruptcies.

Banks win out after the Supreme Court ruled on Monday 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 when the amount owed by the senior lien surpasses the current amount of the collateral if the homeowner’s claim is both allowed under the bankruptcy code and is secured by a lien. This ruling allows the junior lienholders to collect on loans in the event a debtor files bankruptcy and treat the subordinate loan as secured in bankruptcy proceedings.

The ruling, which will mainly benefit commercial lenders, states that the bankruptcy courts are forbidden from “stripping off” junior liens on property if the value on said property is used as collateral 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, 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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