Supreme Court ruling still allows stripping underwater second mortgage in Chapter 13 bankruptcy.
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.
• 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.
Mark Leffler, Shareholder and Chief Legal Officer, joined Boleman Law Firm in 2000. Mark has spent most of his career litigating in Bankruptcy Court, including bringing numerous actions against debt collectors, mortgage companies, and predatory lenders in bankruptcy. He currently focuses his practice on federal consumer protection litigation, mostly under the Fair Credit Reporting Act.
Mark is President of the NACTT Academy for Consumer Bankruptcy Education, is a frequent author for the NACTT Academy’s webzine, and has served as a panelist at numerous national legal conferences such as the National Association of Chapter Thirteen Trustees (NACTT) and the National Consumer Law Center (NCLC). Mark is AV® rated by Martindale Hubbell, he was selected for inclusion in The Best Lawyers in America for his work in bankruptcy and debtor rights, and he is a frequent speaker and author on bankruptcy matters for Virginia CLE programs.
Mark was raised in Williamsburg, VA, and lives in Norfolk, VA with his wife, Leigh, and two children. In his free time, he enjoys staying physically active, regularly training in powerlifting, snow skiing during the winter, and traveling with his wife.