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Chapter 7 bankruptcy does not wipe out second mortgages

Readers of this Long Island bankruptcy blog may have a general understanding of what happens in the two major forms of personal bankruptcy. Under a Chapter 7 petition, a debtor effectively liquidates his assets in order to pay off creditors and achieve a fresh financial start. Under a Chapter 13 petition, the debtor has the opportunity to reorganize his outstanding debts and create a repayment plan that matches his financial abilities.

The ability to eliminate financial obligations can have huge benefits for individuals struggling to get their heads above choppy economic waters. In many cases Chapter 7 bankruptcy can simply wipe out a debt; just recently the Supreme Court of the United States ruled upon a case involving second mortgages and Chapter 7 bankruptcy.

The underlying facts of the case are these. The debtor had filed for Chapter 7 bankruptcy and sought to have his second mortgage debt wiped out due to the fact that his home's value did not support repayment of the debt. A lower court had determined that in bankruptcy such an action could be taken. The Supreme Court, however, ruled against the debtor.

Pursuant to the Court, however, a debt holder has an interest in the property securing the loan even if that property is effectively without value. The ruling only applies to second mortgages, and under Chapter 13 filings a debtor still may be able to have his second mortgage eliminated due to the low value of the securing property.

Bankruptcy is not a cure-all for individuals in dire financial straits. As demonstrated by the Supreme Court's ruling on this matter, debts can survive bankruptcy petitions. Individuals who are struggling with their debts and who are contemplating bankruptcy can work with bankruptcy professionals to evaluate if and which form of bankruptcy is right for their situations.

Source: Forbes.com, "Debtors Can't Void Underwater Mortgages In Bankruptcy, Supreme Court Rules," Daniel Fisher, June 1, 2015

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