In a much awaited decision, the United States Supreme Court ruled in favor of Bank of America and held that "underwater" mortgages are not avoidable in a chapter 7 liquidation case. Noteably, the ruling did not involve a chapter 13 situation.This ruling reversed the decision of the 11th Circuit Court of Appeals located in Atlanta, which covers an area in the southeastern United States. Since many other Courts in other parts of the United States already held that "underwater" mortgages are not avoidable in chapter 7 cases for many years, this new decision does not change the practice in many parts of the country.
Underwater Mortgage
A mortgage is called "underwater" in a situation where the balance due on the first priority mortgage exceeds the value of the property. For example, if $150,000 is owed on the first mortgage and $50,000 is owed on the second mortgage, the second mortgage would be wholly "underwater" if the value of the home is $150,000 or less.
Lien Stripping in Chapter 13
It should be noted though that the Supreme Court's decision was not directed at the avoidability ie. "lien stripping" of wholly underwater second or other junior mortgages or liens in a chapter 13 plan of reorganization.
Chapter 13 Plan
A chapter 13 case is often used to save a home from foreclosure. A typical plan would avoid or "lien strip" a second mortgage and provide for the first priority mortgage with a modification or reinstatement of the arrearages.
