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Thursday, June 4, 2015

United States Supreme Court Decision Not to Allow Strip Down of Wholly Unsecured Second Mortgages in Chapter 7 Provides No Relief to Homeowners and No Practical Benefit to Secured Lenders

      The United States Supreme Court in the consolidated cases "Bank of Amer. v. Toledo-Cardona," and "Bank of Amer. v. Caulkett" decided on June 1, 2015 that wholly unsecured mortgages cannot be stripped down essentially turning them into discharged unsecured debt. This decision leaves unchanged the existing law that partially unsecured second mortgages cannot be stripped down. This decision reversed the lower court's decisions in these cases upheld by the Eleventh Circuit which gave consumer bankruptcy attorneys and their clients hope throughout the country that real relief could be provided to homeowners in situations similar to the debtors in these cases. The court relied heavily on the previous case dealing with this issue “Dewsnup v. Tims” and like many court decisions not the practical and societal effect on debtors. The reality is that after filing a Chapter 7 with two mortgages with the first mortgage debt exceeding the value of the property the second mortgage holder will not likely recover any funds from the debtor. The debtor homeowner will either surrender their property in the Chapter 7 or wait till they are forced to give up their property post-discharge after the bank forecloses. In many cases these second mortgage debts have been charged off by lender even before the debtors file bankruptcy. One would have hoped the Supreme Court had the foresight to recognize the practical effects of their decision. The result is that more homeowners will lose their homes with no practical benefit to the overwhelming majority of underwater second mortgage holders. Since these mortgage holders’ debts are discharged they will not receive any funds from a foreclosure. Also this decision hurts first mortgage holders as well because even though their debt may exceed the value of the debtors' homes the large majority of these debtors want to stay in their homes and will continue to pay down these mortgages and hold onto their homes for the long run. Also these homeowners would be more inclined to seek acceptable mortgage modifications with first mortgage holders if the second mortgages could be stripped. This would mean less foreclosures and less bank owned properties. Therefore, this is not only a loss for debtors, but for banks as well and the plaintiff lender here may ultimately regret the continuing negative impact this decision will have on the housing market.