Can Individuals “Strip Off” Second Mortgages on Underwater Homes in Chapter 7 Bankruptcy? The Supreme Court to Decide
On Monday, November 17, 2014, the U.S. Supreme Court agreed to hear two bankruptcy-related cases that involve issues commonly faced by banks and homeowners with underwater mortgages in Chapter 7 cases. The cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona come from Florida, where many homeowners own homes with mortgages that exceed equity value due to the recent housing crisis. Bank of America holds the second mortgage in both cases.
Bank of America, the nation’s second largest bank holding company, argues that the U.S. Court of Appeals for the Eleventh Circuit broke with the opinions of other U.S. appeals courts in ruling that homeowners in Chapter 7 can void – or “strip off” – a second mortgage pursuant to 11 U.S.C. § 506(d) when the debt owed to the holder of the first mortgage is more than the property's current value. When this occurs, the lender loses its ability to foreclose on the property even if its value increases. Previously, lien stripping was only allowed in Chapter 13 cases.
Bank of America relies on the Supreme Court’s decision in Dewsnup v. Timm which, the bank argues, “emphasized the fundamental and longstanding principle that ‘liens pass through bankruptcy unaffected.’” Thousands of cases pending in lower courts could be affected by the ruling, which is expected in June.
We will closely monitor these cases and keep our readers informed of any developments. If you have any questions, or would like to discuss any bankruptcy-related issues, please contact a Foster Swift attorney.
Laura's practice focuses on bankruptcy, municipal law, collections, and trial-level and appeals litigation. In the bankruptcy arena, she represents primarily Chapter 7 trustees. Laura has handled a wide range of trial and appellate matters for individual and business clients and has appeared before the U.S. Sixth Circuit Court of Appeals, the Michigan Court of Appeals, and the United States Bankruptcy Court for the Western District of Michigan, as well as Michigan circuit and district courts across the state.View All Posts by Author ›