The Supreme Court will hear two consolidated cases to determine whether a Chapter 7 debtor may “strip off” an underwater mortgage.
From SCOTUSblog:
The Supreme Court, taking on a bankruptcy issue that grew out of the collapse of the U.S. housing market, agreed on Monday to sort out when a mortgage debt on a home that has lost its value can be completely wiped out. At issue in a pair of cases is the so-called “strip off” in bankruptcy of a mortgage that is ranked lower than another loan when the mortgaged property is worth so little that it could not cover either debt.
The Court, in the consolidated cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, will be deciding whether a “strip off” of a mortgage is to be barred in the same way that a “strip down” already is, under a 1992 Supreme Court ruling (Dewsnup v. Timm).
In the Dewsnup decision, the Court ruled that the bankruptcy code does not allow a debtor to resist a claim by a creditor by having the value of real property “stripped down” to its current market value. The Court said that the practical effect of allowing “strip down” of a lien in that way would be to freeze the creditor’s claim to a court-determined value, contrary to the earlier view that the value of debts on real property remain unaffected as they pass through bankruptcy proceedings.
The situation in the newly granted cases is that Florida home-owners in Melbourne and Tampa each had first and second mortgages on their properties, and the second mortgages were issued by Bank of America. When the housing bubble burst and the home-owners could not cover their debts, they filed for bankruptcy under Chapter 7. They asked the bankruptcy judge to void their second mortgages, noting that their homes had lost so much value that even the first mortgages involved debts beyond the value of the property — that is, the loan was “under water.”
Both Bank of America loans were wiped out, in decisions upheld by the U.S. Court of Appeals for the Eleventh Circuit, applying circuit precedent that the Supreme Court had left intact in a denial of review last March in an earlier Bank of America case..
Bank of America took both cases to the Supreme Court, arguing that the issue is an important and recurring one in bankruptcy law, and contending that a “strip off” of a lower-ranking lien is no more allowed than a “strip down” is. That is the issue the Justices agreed to hear and decide, later this Term. The two petitions were consolidated for one hour of oral argument.
Citation: Lyle Denniston, Dealing with “underwater” mortgages, SCOTUSblog(Nov. 17, 2014, 10:16 AM), http://www.scotusblog.com/2014/11/dealing-with-underwater-mortgages/