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.

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.