Supreme Court rejects 2nd lien stripping in Chapter 7 bankruptcies | 2015-06-01 | HousingWire
[{"id": "crrzjv3", "text": "I don't follow. How can the junior lien remain secured if the 1st is getting crammed down because of a low valuation? ", "replies": [{"id": "crs1t6j", "text": "In the past the 1st takes priority and the junior is, essentially, SOL.  Considering its Chapter 7, with no plans for ongoing operations, all assets seized or used as collateral for the loans are liquidated and 1st mortgage repaid (the extent that it can be) with subsequent loans being scrapped.  This ruling, in a nutshell, allows junior loans to vie for some recoupment even if the underlying asset is worthless than the 1st, i.e. senior doesn't get to receive all the funds.", "replies": [{"id": "crs2wtp", "text": "Or does it put them in a separate class to be repaid ahead of unsecured creditors? What if real estate isn't the only asset of the debtor, would the 2nd have to also have UCC filings to be able to get repaid via non real-estate assets? ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "crs0906", "text": "whats this actually mean?  That the asset can't be sold without the junior oking it?  Or that they can choose to let their lien sit to tie the property up basically?", "replies": [{"id": "crtro3l", "text": "The latter. As an initial matter, it is important to realize that when a debtor files in bankruptcy and receives a discharge of his debts, the debtor's discharge does not, in itself, extinguish the liens of his creditors in his property. See, e.g., Long v. Bullard, 117 U.S. 617 (1886). Rather, the effect of the debtor's discharge in bankruptcy is to cut off the debtor's **personal** liability for the discharged debt(s). See 11 U.S.C. \u00a7 524(a). At the same time, however, a debtor may choose to reaffirm an otherwise dischargeable debt, in which case the debtor will remain personally liable for the debt. Cf. 11 U.S.C. \u00a7 524(c).\n\nA Ch. 7 debtor whose residence is subject to a \u201cpartially underwater\u201d first-lien mortgage and a \u201cfully underwater\u201d second-lien mortgage may choose to re-affirm his debt to the first-lien mortgagee in order to avert foreclosure.* Let us call this hypothetical debtor Mr. X. If Mr. X chooses to re-affirm his debt to the first-lien mortgagee, the parties will then \u201crestructure\u201d Mr. X's loan debt pursuant to a loan restructuring agreement. Thereafter, as the post-bankruptcy Mr. X builds equity in the property by paying down the \u201crestructured\u201d loan debt, unless the second-lien mortgage has been extinguished in bankruptcy, that equity then becomes subject to the second-lien mortgage. Per *Caulkett*, a Ch. 7 trustee may not invoke 11 U.S.C. \u00a7 506(d) to extinguish a \"totally underwater\" second-lien mortgage. Yet, if the post-bankruptcy Mr. X defaults on the \"restructured\" loan and the first-lien mortgagee forecloses on the collateral, insofar as the second-lien mortgagee's lien remains \"fully underwater,\" the foreclosure will extinguish the second-lien mortgage!! The same is true if Mr. X chooses not to re-affirm his loan debt to our undersecured first-lien mortgagee, who then forecloses on the collateral after the close of Mr. X's bankruptcy case. Alternatively, even if the post-bankruptcy Mr. X pays off the first-lien mortgage entirely, he is still not \u201cout of the woods,\u201d as it were; he must still contend with the formerly \"fully underwater\" second-lien mortgagee (who has now become the first-lien mortgagee). In short, *Caulkett* is bad news for Chapter 7 debtors.\n\n*This situation mirrors that of the debtors in Caulkett.\n\n**N.B. - The Court's holding in *Caulkett* is most salient in Ch. 7 bankruptcies involving individual debtors, meaning that the real estate in question is typically residential, rather than commercial, real estate.**\n", "replies": [], "depth": 2}], "depth": 1}]