CHAPTER 7 SECOND MORTGAGE STRIPPING STOPPED

Chapter 7 second mortgage stripping stopped by the U.S. supreme court further eroding homeowners ability to save their homes in foreclosure.  Chapter 7 Bankruptcy no longer allows stripping of upside down second mortgages. For the past several years if you owed more on your first mortgage than your home was worth, a chapter 7 bankruptcy discharge could strip the secured status of your second “underwater” mortgage treating it as an unsecured debt and relieving you of your obligation to pay.   The theory was that because the second mortgage holder stood to gain nothing from the sale of the home, and because all proceeds from the sale would be put toward satisfying the first mortgage, the second mortgage was, for practical purpose, unsecured as defined by §506(a)(1) of the bankruptcy code and could be discharged in a chapter 7 bankruptcy. Unfortunately for homeowners earlier this year in the case of Bank of America v. Caulkett the U.S. Supreme Court ruled that despite the plain language of the code, a chapter 7 bankruptcy could not strip the secured status of the mortgage holder regardless of how upside down the mortgage is.

In reaching its conclusion the Supreme Court acknowledged that “under a straight forward reading of the statute, debtors would be able to avoid” the claims by bank’s on underwater second mortgages. Despite this acknowledgment the Court looked back in time to a its 1992 decision of Dewsnup v. Timm, which also chose not to follow the statutory definition of “secured claim” under §506(a), reasoning that the term “secured claim” was ambiguous and as long as a bank holds any security interest in a property, there is nothing that can change that status.

The Supreme Court’s ruling is a big win for banks and may ultimately result in a rise in foreclosures and individuals losing their homes due to second mortgage foreclosure. While second mortgages can still be stripped through chapter 13 bankruptcy, chapter 13 is expensive and in most cases requires debtors pay all of their disposable monthly income to a bankruptcy trustee for a 5 year period.

If you have questions about bankruptcy or debt relief please contact Matthew C. Bothwell, Esq., Jacksonville’s debt relief lawyer. We are here to help.