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US top court says 2nd mortgages on 'underwater' homes cannot be voided in bankruptcy

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    US top court says 2nd mortgages on 'underwater' homes cannot be voided in bankruptcy

    The U.S. Supreme Court on Monday handed a win to Bank of America by ruling that a second mortgage on an "underwater" home—one with a mortgage balance exceeding its current value—cannot by voided during bankruptcy.

    On a unanimous vote, the court ruled against two homeowners, David Caulkett and Edelmiro Toledo-Cardona, in Florida, where many homeowners have struggled to pay their mortgages following the recent housing crisis.

    Caulkett and Toledo-Cardona had both won before the regional appeals court that oversees Florida. The 11th U.S. Circuit Court of Appeals had ruled that homeowners in Chapter 7 bankruptcy can void—or in bankruptcy terms "strip off"—a second mortgage when the debt owed to the holder of the first mortgage is more than the property's current value.

    That means the lender loses its ability to foreclose on the property even if its value increases.

    But Bank of America, which is the second mortgage holder in both cases, argued in court papers that the approach taken by the 11th Circuit was different than other appeals courts around the country.

    Read MorePending home sales up 3.4% in April, highest in 9 years

    The cases are Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, U.S. Supreme Court, Nos. 13-1421 and 14-163.

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    I wonder how this is going to affect those of us in Chapter 13 and have a lien strip??!!


      In reading the ruling it looks as if it does not relate to ch 13's.
      11/23/'10-filed ch 13. 1/6/'11-341, confirmed. Below median. Plan completed 11/30/2015. DISSCHARGED 4/4/2016.JP


        What a surprise to read this is Middle district Fla... Not


          This has nothing to do with Chap 13. The title of the article is not well written it should say. "US top court says 2nd mortgages on 'underwater' homes cannot be voided in CHAPTER 7 bankruptcy."

          From the summary at the top of the opinion:

          Held: A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code.
          Here's the opinion:

          I haven't read the opinion, but this isn't surprising. I believe Florida is the only place where they have been doing lien strips in Chap 7 and I am pretty sure that was a recent development.
          LadyInTheRed is in the black!
          Filed Chap 13 April 2010. Discharged May 2015.
          $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!


            Hmmmmm, now that I have read the opinion, I wonder whether it could be applied to Chapter 13 lien strips.

            The ruling is clearly worded to apply to Chap 7, but that doesn't mean creditors can't argue that the same reasoning should apply to Chap 13. I am not familiar with case law regarding Chap 13 lien strips. Maybe there is something that makes 502(a) more helpful to support a Chap 13 lien strip.

            despritfreya and justbroke, any thoughts?
            LadyInTheRed is in the black!
            Filed Chap 13 April 2010. Discharged May 2015.
            $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!


              Guess I missed this thread. Feel free to delete the one I started.

              While lenders may try to expand holding to reorganization cases, I doubt such will hold water. Chapter 11, 12 and 13 have specific provisions that allow for the modification of secured claims. But for the ability to redeem personal property under Section 722, there are no such provisions in Chapter 7. While the USSC looked at Sections 502 and 506, IMO, it really did not have to go any further than recognizing that Chapter 7 is not a reorganization. If Congress wanted to include modification language (other than redemption rights) in Chapter 7 it could have but did not. To me, that is the end of the analysis.



                I'm curious if BOA will extinguish the debtor's second liens anyway as part of the 2014 mortgage settlement with DOJ.


                  Let's hope it doesn't affect CH 13 strips....that would be a huge blow, and worse if they could make it retroactive or anything of the sort


                    If that happens I can see many houses burnt to the ground.
                    11/23/'10-filed ch 13. 1/6/'11-341, confirmed. Below median. Plan completed 11/30/2015. DISSCHARGED 4/4/2016.JP


                      According to this article, might only apply to Chapter 7:-

                      Justices Curb Bankruptcy Filers’ Ability to Have Second Mortgages Canceled

                      Handing banks a victory, the Supreme Court ruled that financially struggling homeowners who file for bankruptcy may not expect to have their second mortgage loans canceled, even if they owe more on their homes than the properties are worth.

                      In a unanimous decision on Monday, the court determined that second mortgages may not be “stripped off,” or voided, if the property is underwater, or worth less than the mortgage debt.

                      The ruling keeps intact a major protection for mortgage lenders, which extended tens of billions of dollars of second mortgages during the housing boom on homes that are now worth much less than their values when they were purchased. It also closes a legal avenue for homeowners with limited incomes and overwhelming debt to shed their underwater properties, bankruptcy lawyers say.

                      Continue reading the main story
                      RELATED COVERAGE

                      Bank of America argued that second mortgages should not be voided in bankruptcy.In Debt: Supreme Court Ruling Little Help to Struggling HomeownersJUNE 1, 2015
                      The ruling, written by Justice Clarence Thomas, stems from Chapter 7 bankruptcy cases filed in 2013 by homeowners who sought to strip off their second mortgages. One of the homeowners, David B. Caulkett, owed a first mortgage totaling $183,264 at the time of his bankruptcy filing, but his Florida home was valued at $98,000.

                      The lender for Mr. Caulkett’s first mortgage could have expected to recover part of the loan by selling the home, since the house was considered collateral for the loan. But his lawyer argued that his home was so far underwater that the $47,855 second mortgage he took out from Bank or America was essentially unsecured, and thus should be stripped off as part of his bankruptcy filing.

                      In bankruptcy, Americans are typically permitted to cancel unsecured debts like credit cards and personal loans. The question before the Supreme Court was whether a second mortgage could be considered such an unsecured debt because the “security” backing the loan had been wiped out by falling home values.

                      In a different case in 1992, the Supreme Court defined a “secured claim” as one “supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”

                      But the United States Court of Appeals for the 11th Circuit in Atlanta sided with Mr. Caulkett, and Bank of America appealed the ruling to the Supreme Court.

                      The justices ruled on Monday that the second mortgage could not be stripped off simply because the home, the security underlying the debt, was worth less than the mortgage.

                      During the housing boom, lenders extended multiple mortgages, like home equity loans, to homeowners, often enabling them to overextend their finances. These loans provided many homeowners with an additional source of cash to pay for college, medical bills or other expenses. And many consumers had hoped that soaring home values would one day allow them to pay off the additional loans in addition to the initial mortgages.

                      The Supreme Court ruling will now prevent underwater homeowners from easily discharging home equity loans and other types of second mortgages in Chapter 7 bankruptcies.

                      The ruling covers a potentially large pool of people who might seek bankruptcy protection as a solution to their housing woes. In Florida alone, 23 percent of the state’s roughly 1.3 million underwater homes have multiple mortgages, according to an analysis in March by RealtyTrac.

                      A ruling in favor of the homeowners might have made banks and other lenders less willing to extend second mortgages in the future, although banks have greatly curtailed home equity lending since the financial crisis.

                      The Supreme Court ruling does not completely prevent homeowners from voiding their second mortgages. Bankruptcy lawyers say homeowners may still seek to strip off second mortgages by filing Chapter 13 bankruptcy cases. But that process, the lawyers said, can cost more and take many years to complete. By contrast, Chapter 7 is geared toward helping lower-income people and typically takes just months.

                      “Chapter 7 is for people who need the most help,” said Linda Tirelli, a lawyer in White Plains who represents homeowners. “This ruling is an attack on the poor.”


                        So.... We did this. We were one of the 1300 or so cases that stripped our second. Already have the order. Now i wonder what will happen?! I assume the order will stand unless they reopen the case.


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