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Supreme Court changes the game for Chapter 7 bankruptcy

Chapter 7 bankruptcy is undergoing a significant change following a ruling from the United States Supreme Court. The decision followed a case involving the prominent lender, Bank of America, and is believed to benefit lenders and those who are in debt. While news of this change might be less than pleasant, it only affects second liens of underwater properties, making Chapter 7 bankruptcy still a viable and appropriate option for Washington debtors who are unable to pay.

One of the most attractive aspects of Chapter 7 is the ability to either discharge or void most debts. In the past, liens that were far greater than a home's depressed value could be voided, meaning that a lender would not receive any type of guaranteed payment from a sale of that home and could not seize the collateral. Many lenders found this practice unfair and claimed that it was not their fault that a home's value was depressed. This practice, lenders said, stripped away some of their income.

However, it was not a complete victory for lenders. While stripping away second liens is no longer permitted in a Chapter 7, those who file for a Chapter 13 bankruptcy can still ultimately have that second lien stripped away. However, even then debtors must demonstrate that they have a consistent income and are on course with a payment plan to repay their debts.

Changes like this to the bankruptcy system only serve to harm consumers while rewarding ravenous lenders and creditors. People in Washington who are ready to file for bankruptcy might now want to consider if stripping the second lien from a home is an important task for them to complete. If so, Chapter 13 could ultimately be a better choice, while those who are not concerned with this or do not own a home might still prefer Chapter 7.

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

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