No stripping second mortgages Chapter 7 bankruptcy

Chapter 7 and Chapter 13 bankruptcy clients with second mortgages always ask about stripping second mortgages in bankruptcy. Up until this week I could counsel clients about stripping second mortgages either in Chapter 7 bankruptcy or Chapter 13 bankruptcy.  No longer.

Though Atlanta’s real estate recovery is real, if you have a house with more than one mortgage and you live in metro-Atlanta (e.g. not ‘in-town’), there is a strong chance that your home is still worth less than the value of both mortgages. Things are better, but you are still underwater.

With its unanimous vote this week, the Supreme Court issued its long-anticipated decision saying No to stripping second mortgages in Chapter 7 bankruptcy.  The case is In re Caulkett.

The decision closes the door on the bankruptcy court’s power to remove second mortgages from real estate that is underwater, and yes, it is a defeat from a consumer’s perspective.  But this anti-consumer outcome was widely anticipated, and was not a surprise.

Stripping second mortgages still allowed in Chapter 13

Though we expect a Big Mortgage challenge to stripping in Chapter 13 to follow, this decision does not currently affect our ability to strip mortgages in Chapter 13.

This is because the part of the code that gives us the power to strip mortgages in Chapter 13 is based on much firmer legal ground.  The code section that was used to strip mortgages in Chapter 7 cases was based on very shaky legal ground.

This decision also does not undo strips of second mortgages obtained in Chapter 7 cases that are already completed.

Why does this change in the bankruptcy code matter to you?

The good news is that you can still achieve a fresh start and you can still get relief from your underwater mortgage. The bad news is that it’s only via Chapter 13.  Chapter 13 bankruptcy is a much longer and potentially much more expensive process. In Chapter 13 your attorney’s experience and ability to get results makes all the difference.  Are you hiring the person will lead you to a successful discharge, or is the attorney you’re interviewing only going to cause you frustration and lead to a dismissal?

How much access will you have to your Chapter 13 attorney?  How experienced is your attorney? Do you feel like your attorney is acting in your best interests? These are all questions to think about when you interview the person who you are thinking about hiring to represent you.