SCOTUS issues holding on lien stripping in Chapter 7 bankruptcy cases

Removing liens is an option for some bankruptcy cases. SCOTUS recently clarified when it works, and when it does not.

People throughout the United States continue to struggle financially. This is supported by the latest data from United States Bankruptcy Courts, finding 1,262,140 petitions for relief were filed in 2012 alone.

Those filing for financial relief through bankruptcy can have a number of questions and concerns about the process. One of the more common questions involves the handling of mortgages and the impact the process will have on the petitioner's home. In some cases, a petition for bankruptcy can result in stripping, or removal, of certain mortgages or liens. In others this is not an option. The Supreme Court of the United States (SCOTUS) recently agreed to hear a case questioning this process; specifically looking at whether a debtor could "strip off" underwater second lines during Chapter 7 bankruptcy proceedings.

More on the case

The case, Bank of America v. Caulkett , calls Section 506(d) of the Bankruptcy Code into question. This section allows for a debtor to void liens on property "to the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim." Although the homeowners in this instance agree that the claim is allowed under the definition of this section, they argued that the claim was not secured. This argument was based on the fact that the home had a market value less than the amount owed on the first, senior mortgge. This resulted in the second mortgage being completely underwater.a

Ultimately, the court held in favor of the lien holder, pointing to precedent to support the decision. In Dewsnup v. Timm, the court previously determined that those petitioning for relief through a Chapter 7 bankruptcy are not able to "strip down" a partially underwater lien to the value of the collateral, in this case the home, under section 506(d). As a result, this court further held that a "secured claim" is one that is "supported by a security interest in property, regardless of the whether the value of that property would be sufficient to cover the claim."

Lessons for homeowners in similar situations

For those who are looking to strip a lien off with a bankruptcy proceeding, other options are available. The process is still generally an option for petitioners moving forward with a Chapter 13 bankruptcy.

This case provides an example of the evolving nature of bankruptcy law. As a result, those considering moving forward with a petition for relief are wise to seek the counsel of an experienced bankruptcy and debt relief attorney. This legal professional will review your situation and explain the various options that are available, better ensuring you receive the relief you need.