Michigan Bankruptcy Blog

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.

Categories: Chapter 7, U.S. Supreme Court