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U.S. Supreme Court weighs in on Chapter 7 underwater mortgages

As a strapped debtor seeking relief against a second lien claim on a home through the bankruptcy process, you need to be focusing on Chapter 13 rather the protections afforded through Chapter 7.

That is the bottom-line takeaway from a federal bankruptcy case just decided by the United States Supreme Court, in which justices reversed a lower-court decision allowing debtors to free themselves of junior liens on depressed real estate.

"Depressed" in the context of the 8-0 opinion rendered by the court means property valued at a price that is beneath the value of a junior lender's claim.

On the one hand, it can be argued -- as it was to the court -- that a debtor should logically be allowed to strip away a junior lien relating to a home that actually lacks sufficient value to pay off that lien, even though it is a secured obligation.

In other words: What good is a secured lien if it has no current value, that is, if the mortgage to which it applies is underwater?

The court stated that established precedent guided its ruling, specifically, the notion that a secured claim to an asset under Chapter 7 remains valid even if the asset lacks current value.

As a Forbes article on the ruling notes, "it is a victory for lenders."

Notwithstanding the case outcome, though, it remains the case that underwater junior liens can still be stripped though the Chapter 13 bankruptcy process.

The ruling is obviously very important under certain scenarios and will need to be carefully considered by some debtors seeking to invoke bankruptcy protections.

A proven bankruptcy attorney with experience guiding clients through both the Chapter 7 and Chapter 13 bankruptcy processes can answer questions and provide diligent representation in any debt-relief matter.

Source: Forbes, "Debtors can't void underwater mortgages in bankruptcy, Supreme Court rules," Daniel Fisher, June 1, 2015

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