Thursday, July 23, 2015

Supreme Court denies the ability of a Chapter 7 debtor to strip away an unsecured second mortgage

In a recent bankruptcy decision, Bank of America v. Caulkett, the Supreme Court denied a chapter 7 debtor's attempt to strip away or discharge an unsecured second mortgage in a chapter 7 bankruptcy filing.

The debtor, Mr. Caulkett, owned a house in Florida. The house was subject to a first mortgage in the amount of $183,264, the house had a fair market value of $98,000 and was subject to a second mortgage in the amount of $47,855, that was held by the Bank of America.

Mr. Caulkett's position was that since the Bank of America second mortgage was "underwater", or totally unsecured, the second mortgage should be stripped away or discharged in the chapter 7 bankruptcy filing like a credit card debt.

The Supreme Court, relying on an earlier decision known as Dewsnup denied the Debtor's claim stating that the outcome in Caulkett was controlled by Dewsnup . Although in a footnote by Justice Thomas, Justice Thomas noted that from its inception Dewsnup has been the target of criticism. Additionally during oral argument one of the Justices asked the Debtor if they were seeking to overturn Dewsnup and counsel for the debtor said no. In the future a debtor may seek to have Dewsnup overturned based on this footnote.

Notwithstanding the Caulkett decision which involved a chapter 7 bankruptcy case, a debtor may still be able to strip off or discharge an unsecured second mortgage or home equity loan in a chapter 13 bankruptcy case. Homeowners whose houses are underwater and subject to a second mortgage, may want to seek a consultation to determine their options with Jim Shenwick.

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