Search This Blog

Tuesday, November 18, 2014

Supreme Court to Hear Case Allowing Strip-Down of Wholly Unsecured Mortgage in Chapter 7 Case

      The  United States Supreme Court granted certiorari yeterday in two of the three Chapter 7 lien-strip-off cases challenging the Eleventh Circuit decision in McNeal. Bank of Amer. v. Toledo-Cardona, No. 14-163 and Bank of Amer. v. Caulkett, No. 13-1421 (petition granted Nov. 17, 2014) (consolidated for argument) (Bank of Amer. v. Bello, No. 14-235 is still pending). In McNeal v. GMAC Mortg., 735 F.3d 1263 (11th Cir. 2012) pet. den. (May 20, 2014), the court bucked the trend to find that Dewsnup v. Timm, 502 U.S. 410 (1992), which held that a partially secured lien could not be stripped-down in chapter 7, did not apply to wholly unsecured liens. These are liens including second mortgages for which based on the value of the property there is no equity after the first lien on the property which usually in these cases is the first mortgage.  There are more than a dozen cases currently pending in the Eleventh Circuit challenging this decision, but, after an early unsuccessful attempt to bring the issue before the Supreme Court (Bank of America v. Sinkfield, No. 13-700 (cert. denied, March 31, 2014)) the issue is now on track for final resolution. Briefing should be completed by March and argument is likely to be scheduled for the last week of March, with decision projected sometime in June. 
        Currently debtors can only strip down, which means convert a secured debt to an unsecured debt, wholly unsecured liens including mortgages in Chapter 13 cases. Chapter 13 debtors depending on their income may still have to pay some of this debt of as unsecured debt in their plans. If the Supreme Court does allow this type of strip downs in Chapter 7 cases it will help many debtors who own underwater homes with wholly unsecured second mortgages. If these debtors qualify for a Chapter 7 and can still afford to pay the first mortgages on their homes they can strip down their wholly unsecured second mortgages and discharge this debt along with their other unsecured debt. This will allow more homeowners to keep their homes and obtain a better fresh start from their Chapter 7 bankruptcy filings, Stay tuned to future posts to my blog and I will let you know when this decision comes down from the court.