As a Bankruptcy lawyer I can’t count how many times people have asked why Courts won’t reduce their mortgage debt to match the deflated value of their home, or why they should pay anything on that second mortgage, line of credit, or HELOC, when they’re underwater. I even discussed these questions and the state of the law concerning lien strips in this post. Now, the very cases referred to in that post have made it to the U.S. Supreme Court and the stage is set for the battle of the lien strip cases.
Of course this all started with the Supreme Court’s 1992 Opinion in Dewsnup v. Timm that the Bankruptcy Code does not permit the cramdown of a partially secured mortgage. Some Courts took this to mean that lien-strips are a no-no. Others interpreted it to mean that lien-strips were permissible under the right circumstances. So in some parts of the country a completely unsecured second mortgage can be stripped, but only in a Chapter 13 reorganization; while in other parts it can be stripped in a Chapter 7 liquidation, too.
So, with Courts in disagreement, what’s a home-owner to do? Remember, in Dewsnup the Court ruled the Bankruptcy Code doesn’t permit mortgages to be written down to the value of the home – even though that practice, known as the cram down, is acceptable as to vehicles. Ironically, one of the Court’s primary concerns in Dewsnup was to prevent windfall gains to home-owners who strip away their loans, then enjoy the profits as their homes rise in value.
But that didn’t exactly happen, did it? These days, most people’s homes are more a burden than a boon. Luckily the Supreme Court has agreed to take another look at the question. And just in time: being underwater with your 1st mortgage while having an unsecured 2nd is the new normal. And nowhere is that more true than in Florida where both cases to be consolidated and heard by the Court, Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, started off as Chapter 7 Bankruptcies.
In a nutshell, the issue to be decided is whether, in a Chapter 7, partially secured mortgages can be written down and unsecured ones written off, despite the Supreme Court’s Dewsnup decision. Here, Florida home-owners filed Chapter 7 and were allowed to strip their unsecured second mortgages. That decision by the Bankruptcy Court was affirmed by the Federal District Court as well as the 11th Circuit Court of Appeals. Bank of American now wants the Supreme Court to outlaw Chapter 7 lien strips once and for all.
Stay tuned to this station as the case goes up for argument and decision. We’ll bring you the opinion as soon as it’s available.
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