September 1, 2015

Court Decides Unsecured Liens Cannot be Wholly Voided in Chapter 7

In two cases involving the Bank of America in 2015, the Supreme Court held that even multiple mortgages on the same property (each is known as a junior lien mortgage), cannot be void in a Chapter 7 Bankruptcy debt if the value of collateral securing the debt is less than the outstanding indebtedness owed on the first mortgage. This means that if you are filing for Chapter 7 Bankruptcy, you cannot void the additional mortgages if the total outstanding debt owed under the first mortgage exceeds the fair market value on the property.

There is a significant difference between secured and unsecured liens; a secured lien has some value of collateral for the creditor while an unsecured lien has no value of collateral for the creditor. This value is ultimately the major difference between whether a party can void a lien. If the property is already considered “underwater”, meaning that there is more owed on it than the fair market value is worth, the lien is considered unsecured and cannot be voided in a Chapter 7 Bankruptcy. This holding protects lenders and the banking industry that provide these loans and mortgages.

Chapter 7 involves a lot of rules and regulations that you must comply with in order to wipe out your debts and have a fresh start. Before this ruling, it was possible to have these unsecured liens voided when the property at issue was considered underwater. This statute makes it impossible to have these unsecured liens voided from your debt along with all your other qualified debts under this category.

Filing for bankruptcy can be confusing and difficult, but there may be other alternatives. Contact an experienced lawyer to help you find what option is right for you. The Law Office of Michael Alan Siddons can help you figure out exactly what steps you should take if you are having trouble with debt. Call today for a free consultation at (610) 255-7500.