Supreme Court Disallows Lien-stripping in Chapter 7 Bankruptcy Cases

More on this later, but for now, I wanted to share the U.S. Supreme Court’s latest big bankruptcy decision, Bank of America v. Caulkett, issued by the Court today. The decision prohibits debtors from “stripping” their “wholly unsecured liens in chapter 7 bankruptcy cases – something which had been very rarely allowed by bankruptcy courts anyway, and previously prohibited in Denver bankruptcy courts after a decision by the Tenth Circuit Court of Appeals in Woolsey v. Citibank in 2012.  The Court’s primary reasoning (in this unanimous opinion) was that the Debtors did not present a compelling enough reason for distinguishing their case (where a creditor held a “wholly unsecured” lien on their underwater home) from the facts in Dewsnup v. Timm, a poorly-reasoned, but binding, decision by the Supreme Court in 1992 which dealt with a partially secured mortgage lien. Moreover, the Court, while giving some criticism of the Dewsnup opinion, held the debtors did not ask the Court to overrule this opinion.

What Does This Opinion Mean for My Possible Bankruptcy?

So if your house is so far under-water that it has a fair market value less than what you owe on your senior mortgages or liens, then this decision just means that you can’t use a chapter 7 bankruptcy to void or “strip off” your “wholly unsecured” junior liens.

If you’re in this position, the answer is to see a Denver-area bankruptcy attorney about your options for filing under chapter 13 of the bankruptcy code