Supreme Court Hears Two Arguments Reflecting Personal Bankruptcy Law

Allegory of Justice
The U.S. Supreme Court is currently hearing two ongoing cases that could have far-reaching impacts on personal bankruptcy law.

According to an April 1 Jurist article, the justices recently heard oral arguments regarding Harris v. Viegelahn, a case in which the courts must decide how funds are to be distributed when a debtor converts his or her bankruptcy case from a Chapter 13 plan to a Chapter 7 bankruptcy.

Bankruptcy petitioner Charles Harris originally filed a Chapter 13 bankruptcy repayment plan, making payments for his reorganized debts for about a year. With about 333,626 Chapter 13 bankruptcies filed annually, this repayment plan is the second most common form of personal bankruptcy.

Upon exercising his right to convert his bankruptcy to a Chapter 7 case, however, his former Chapter 13 trustee distributed more than $4,300 of Harris’ wages to his other creditors — which prompted Harris to compel a refund of his money. Whether that money should be refunded to Harris or not is the current issue at play before the Supreme Court.

Meanwhile, Bank of America v. Caulkett may impact far more Americans who file Chapter 7 and Chapter 13 bankruptcy as a way to escape overwhelming debts. According to the New Republic, if Bank of America wins this case, it could make post-bankruptcy financial recovery even more difficult for people who file, primarily homeowners.

Under current bankruptcy law, primary residence mortgages cannot be modified or discharged in a bankruptcy filing. However, secondary mortgages are permitted to be discharged in Chapter 13 bankruptcies — and in this case, Bank of America seeks to prohibit secondary mortgages from being stripped off.

If this happens, debtors who have second mortgages would virtually be prohibited from filing Chapter 7 bankruptcy. And when only 40% of Chapter 13 filers successfully complete their payment plans, this could put many filers in a worse financial state than they were in beforehand.

It’s unclear when the Supreme Court justices will rule on either case — but when examined side by side, it’s clear these two cases could have long-lasting, potentially devastating effects for the average American.

Leave a Reply

Your email address will not be published.