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Supreme Court: Chapter 7 cannot be used to strip second mortgages

For people in Oregon, and elsewhere, who are struggling with debt, housing-related problems often contribute to their financial challenges. As a result, many turn to Chapter 7 bankruptcy to help them get out from underneath their mortgage loans. Following a recent decision from the U.S. Supreme Court, however, filing for Chapter 7 bankruptcy will no longer provide relief for those with underwater second mortgages.

According to reports, the Supreme Court recently ruled that it would not be fair to force lenders to relinquish their claim to properties because their current values are reduced. The decision reversed a prior ruling from a lower court. At the heart of the case was a question over whether claims on second liens fit the definition of secured as established in the bankruptcy code. Lawyers representing a homeowner in the case argued that second liens should not qualify as secured in cases when selling the home would not recover at least the amount of the claim.

The ruling rejects the idea that a claim is worthless if it is greater than the value of a home. Instead of stripping off a lien, leaving lenders with no asset and no payment, the ruling reportedly allows those holding second liens to remain involved when borrowers opt to file for Chapter 7 bankruptcy.

There are a number of exceptions, and other complexities, involved with filing for Chapter 7 bankruptcy. As such, it may benefit those considering this option to consult with a legal professional. An attorney may help them determine if Chapter 7 bankruptcy is the right choice for their situation, and guide them through the filing process.

Source: Forbes, “Debtors Can’t Void Underwater Mortgages In Bankruptcy, Supreme Court Rules,” Daniel Fisher, June 1, 2015 

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