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June 01, 2015
High court blocks 'strip-off' of junior liens in bankruptcy
Borrowers whose homes' values are fully underwater cannot "strip off" or void a junior lien when filing for Chapter 7 bankruptcy, the Supreme Court has ruled, 9-0.
A home-equity loan can be a "junior lien," taken out after a first mortgage and using a home as collateral.
The decision was announced Monday. In the case (Bank of America v. Caulket), two borrowers each had two mortgages on their homes; Bank of America held the junior liens. Both borrowers were underwater and filed for Chapter 7 bankruptcy protection two years ago. The borrowers wanted to "strip off" the junior mortgages, or drop those debts.
In its ruling, the court cited a decision from a prior case (Dewsnup v. Timm), finding that lenders still have a secured claim "regardless of whether the value of that property would be sufficient to cover the claim."
NAFCU Regulatory Counsel Kavitha Subramanian, who analyzed Monday's decision, said the court reversed a ruling by the U.S. Court of Appeals for the 11th Circuit and it affirms protection for commercial lenders in a Chapter 7 proceeding for all mortgage debt owed regardless of the value of the underlying home.
The court found that a "secured claim" is one supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim, Subramanian said.
"Thus, even if the value of the property was not sufficient to cover the senior lien on the mortgage, the Bankruptcy Court is not permitted to void – or ‘strip off' – the junior mortgage liens; the junior lien is still a secured interest in the property," she said.
The court argued that allowing a lender's secured status to be contingent on the underlying value of the property could result in wildly different results in a bankruptcy proceeding and could impact credit availability in the market.
A home-equity loan can be a "junior lien," taken out after a first mortgage and using a home as collateral.
The decision was announced Monday. In the case (Bank of America v. Caulket), two borrowers each had two mortgages on their homes; Bank of America held the junior liens. Both borrowers were underwater and filed for Chapter 7 bankruptcy protection two years ago. The borrowers wanted to "strip off" the junior mortgages, or drop those debts.
In its ruling, the court cited a decision from a prior case (Dewsnup v. Timm), finding that lenders still have a secured claim "regardless of whether the value of that property would be sufficient to cover the claim."
NAFCU Regulatory Counsel Kavitha Subramanian, who analyzed Monday's decision, said the court reversed a ruling by the U.S. Court of Appeals for the 11th Circuit and it affirms protection for commercial lenders in a Chapter 7 proceeding for all mortgage debt owed regardless of the value of the underlying home.
The court found that a "secured claim" is one supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim, Subramanian said.
"Thus, even if the value of the property was not sufficient to cover the senior lien on the mortgage, the Bankruptcy Court is not permitted to void – or ‘strip off' – the junior mortgage liens; the junior lien is still a secured interest in the property," she said.
The court argued that allowing a lender's secured status to be contingent on the underlying value of the property could result in wildly different results in a bankruptcy proceeding and could impact credit availability in the market.
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