Chapter 7 bankruptcies may not void a junior mortgage lien on underwater property
Bank of America v. Caulkett & Bank of America v. Toledo-Cardona
On June 1, 2015, the Supreme Court of the United States handed down its decision regarding a Chapter 7 debtor’s ability (or inability, rather) to strip off a wholly unsecured junior lien on debtor’s property. Previously, in Dewsnup, the Supreme Court held that a Chapter 7 debtor could not strip a partially unsecured lien of a junior debtor down to the amount actually secured by the property, reasoning that the entire lien was considered an “allowed secured claim” under section 506(d) of the Bankruptcy Code. However, in Caulkett and Toledo-Cardona (decided together), the Supreme Court decided for the first time the possibility of stripping off a junior lien which was wholly unsecured, ultimately holding that a “secured claim” is a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.
Although these unsecured junior mortgages are not able to be stripped off in Chapter 7 bankruptcies, debtors still have other options for dealing with such debts. First, although the lien remains on a property in Chapter 7, the debtors are released from personal liability for any negative equity that may exist. Additionally, debtors may choose to file a Chapter 13 bankruptcy which, although more costly and taking a longer time, allows the unsecured portion of a junior mortgage to be effectively stripped off.
Bank of America v. Caulkett & Bank of America v. Toledo-Cardona
On June 1, 2015, the Supreme Court of the United States handed down its decision regarding a Chapter 7 debtor’s ability (or inability, rather) to strip off a wholly unsecured junior lien on debtor’s property. Previously, in Dewsnup, the Supreme Court held that a Chapter 7 debtor could not strip a partially unsecured lien of a junior debtor down to the amount actually secured by the property, reasoning that the entire lien was considered an “allowed secured claim” under section 506(d) of the Bankruptcy Code. However, in Caulkett and Toledo-Cardona (decided together), the Supreme Court decided for the first time the possibility of stripping off a junior lien which was wholly unsecured, ultimately holding that a “secured claim” is a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.
Although these unsecured junior mortgages are not able to be stripped off in Chapter 7 bankruptcies, debtors still have other options for dealing with such debts. First, although the lien remains on a property in Chapter 7, the debtors are released from personal liability for any negative equity that may exist. Additionally, debtors may choose to file a Chapter 13 bankruptcy which, although more costly and taking a longer time, allows the unsecured portion of a junior mortgage to be effectively stripped off.
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