Here is an update on the supreme court ruling regarding the blog post below on Chapter 7 filings. The Supreme Court ruled that there can no longer be any “stripping of junior mortgages in Chapter 7.”
If you remember reading our last blog, concerning two separate cases the Supreme Court was hearing regarding Chapter 7 bankruptcies, mortgages and market value, the outcome would be a harbinger of future decisions regarding second mortgages and fluctuating values of the properties they were attached to. Well the court came to a decision.
The point of contention was whether or not a second mortgage could be voided by the debtor if the total value of the home was worth less than the initial mortgage. After lower courts had initially ruled in favor of the debtors, the Supreme Court reversed those rulings and ruled in favor of the banks, leaning heavily on a previous ruling regarding similar circumstances. In short no more lien stripping wholly unsecured mortgages in a Chapter 7, but it is still available under Chapter 13 bankruptcy.
If you want to read the Supreme Court’s decision here it is:
For many years the ability to strip-off wholly unsecured liens from homes was solely accomplished through Chapter 13 bankruptcies. Debtors who would otherwise file a Chapter 7 bankruptcy would have to file a Chapter 13 to accomplish the lien strip on their property. In recent years, debtors in Florida have been able to strip off unsecured second mortgages in Chapter 7 bankruptcies based upon two cases in the Eleventh Circuit U.S. Court of Appeals. However, that all may be about to change. Chapter 7 debtors may no longer enjoy the benefit of stripping off unsecured mortgages off of their property.
On March 24, 2015, the Supreme Court began hearing arguments in two cases regarding whether or not a chapter 7 debtor is permitted to strip off a second or any junior mortgage that is not secured by the home’s actual market value.
In Bank of America, N.A. v. Toledo-Cardona, No. 14-163, the market value of the chapter 7 debtor’s home was $77,689.00. The first mortgage owed to Quicken Loans had a balance of $135,703.00, and the second mortgage owed to Countrywide Bank had a balance of $32,000.00.
In Bank of America, N.A. v. Caulkett, 13-1421, the market value of the chapter 7 debtor’s home was $98,000.00, the Countrywide Financial first mortgage balance was $183,264.00, and the Countrywide Financial second mortgage balance was $47,855.00.
In both cases, the homes were worth less than the remaining balances owed on the first mortgages. Therefore, the second mortgages were completely unsecured. The chapter 7 debtors argued that, under bankruptcy code section 506(a), the second mortgages should be nullified and stripped from the homes. The Eleventh Circuit U.S. Court of Appeals approved the strip-off of the second mortgages in each of the cases. In turn, the banks have appealed to the U.S. Supreme Court in an effort to overturn both judgements.
The outcome of this decision will either mandate that unsecured junior mortgages can only be stripped off in a Chapter 13 or, if the Supreme Court chooses to accept the debtors’ arguments, then ALL chapter 7 debtors will have the right to strip off wholly unsecured mortgages. For those debtors within the jurisdiction of the Eleventh Circuit who are on the fence about filing a Chapter 7, now may be the time to jump in and file that case just in case the U. S. Supreme Court decides to close that window.