It has been settled law in every circuit but one that wholly unsecured subordinate mortgages could not be stripped-off in chapter 7 cases. But since it only takes one heterodox circuit to create a split in the circuits, the US Supreme Court decided on November 17 to hear arguments on the question. Commentary on the issue will no doubt focus on how allowing debtors to strip-off wholly unsecured mortgages in chapter 7 cases would be a great boon to the ordinary consumer debtor, allowing them to stay out of the chapter 13 cases that, currently, is the primary context for accomplishing a lien-strip. For most debtors, though, filing a chapter 13 case to strip-off a second mortgage isn’t that big of a deal. At least in the Eastern District of North Carolina, “zero percent” plans (where there are no payments made to the general unsecured creditors) are quite common, and the primary down-side lies in slightly higher attorney fees and a longer time in bankruptcy.
No, the real winners in the (unlikely) event that the US Supreme Court sides with the minority position and allows chapter 7 lien-strips will be those debtors who do not qualify for chapter 13 because of the debt-limits under 11 USC 109(e). Though there are obviously many differences between chapter 7 and chapter 13 and, all things being equal, a chapter 7 is usually considered a less disruptive solution to a family’s debt problems than chapter 13, the chapters at least sing in the same key. They inhabit the same world. To file the one rather than the other is usually accompanied by a sigh and a shrug. But to those debtors for whom chapter 13 is not an option, to be pushed from chapter 7 into chapter 11 usually elicited a sigh, a shrug…and a scream. It this category of debtor who will actually rejoice the most if the Supreme Court allows chapter 7 lien-strips.