R.I.P. - Bankruptcy Strip Offs Of Underwater 2nd Mortgages In Chapter 7 Proceedings; Supremes Sound Death Knell For Slick, But Short-Lived Way To Wipe Out Subordinate Home Loans By Some Financially Distressed Homeowners Seeking Fresh Start; 'Green Light' Remains Steady For Similar Lien Stripping In Chapter 13, "Chapter 20" Reorgs
In Washington, D.C., Forbes reports:
- The U.S. Supreme Court reversed a lower-court decision allowing debtors to “strip off” underwater second liens in Chapter 7 bankruptcy, saying precedent required it to keep such mortgage claims intact.
Justice Clarence Thomas, caught between his usual adherence to the strict wording of statutes and the competing doctrine of stare decisis, ruled that a prior decision carved out an exception from bankruptcy law for mortgage liens.
The unanimous decision in Bank of America v. Caulkett is a victory for lenders who said it would be unfair to require them to give up potentially valuable claims simply because a home’s current value is depressed. It’s a defeat for consumer advocates who favor using bankruptcy to reduce the amount borrowers owe against their houses, although borrowers can still strip underwater second liens through the more costly and time-consuming process of Chapter 13 bankruptcy.(1)***
The Supreme Court already has ruled that in Chapter 13 reorganizations, where debtors with reliable income set up a plan to repay creditors over time, second mortgages with no collateral value to back them up can be stripped.(2)
(1) See Why the Supreme Court Might Actually Rule Against the Corporate Interest:
- The reason it matters that you can strip off a second loan in Chapter 13 bankruptcy but not Chapter 7 is that Chapter 7 is a much more affordable part of the bankruptcy code.
“Chapter 13 has a payment plan, you only get the strip-off if you complete the plan,” said bankruptcy expert Bob Lawless. Only about 40 percent of Chapter 13 cases complete the payment plan, which is three times as expensive as in Chapter 7.
It notes reminding that, in the "Chapter 20 bankruptcy" context, while the law precludes a debtor from receiving a new discharge of his/her debts in a Chapter 13 bankruptcy within four years of a Chapter 7 petition that ultimately resulted in a discharge, a debtor can still file the Chapter 13 petition without seeking discharge, but to gain the other benefits that Chapter 13 offers - automatic stay, ability to cure arrearages, the ability to adjust interest rates under plan payments, ability to strip off liens that are completely underwater, among other benefits. See generally:
- Todd, Timothy M., To Lien Strip or Not to Lien Strip: Fourth Circuit Blesses Controversial 'Chapter 20' Valueless Lien Stripping in In re Davis (July 24, 2014). South Carolina Law Review, Vol. 65, Issue 4, p. 963 (2014). Available at SSRN: http://ssrn.com/abstract=2471249
- Spector, Arthur J; Homer, Ilyse M; Avron, Paul A. Eleventh Circuit: "Chapter 20" Debtors Can Strip Off Liens. American Bankruptcy Institute Journal33.8 (Aug 2014): 54-55.
- National Consumer Bankruptcy Rights Center: Debtors Enjoying Growing Consensus on Chapter 20 Lien Strip Cases.