Supreme Court decides second mortgages are worth more than the paper they're written on
Posted on 06/16/2015 at 09:31 AM by John Lande
This blog previously covered a pair of cases pending before the United States Supreme Court that presented the following question: Can a debtor who files for Chapter 7 bankruptcy strip off a second mortgage if the outstanding debt owed on the first mortgage exceeds the value of the collateral?
On June 1, 2015, the United States Supreme Court answered the question no. The Supreme Court's decision ensures that junior liens will survive Chapter 7 bankruptcies even when the collateral is worth less than the amount of the first lien. The Supreme Court relied on its prior decision in Dewsnup v. Timm, where the Court held that a Chapter 7 debtor cannot strip down the value of a lien to equal the value of the collateral. The same is now true for junior lien holders when the value of the collateral is less than the amount of the first lien. Of course, the Supreme Court's ruling does nothing to change the practical realities for junior lien holders where the collateral is worth less than the value of the first lien. Nevertheless, the Supreme Court's decision ensures that if a debtor files for Chapter 7 bankruptcy the junior lien will survive the bankruptcy.
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- John Lande
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