These could change the face of Chapter 7 bankruptcy entirely. Right now, debtors in chapter 7 cannot strip their second mortgages. If SCOTUS rules for the debtors in these cases, we could have the ability to strip unsecured second mortgages without having to put debtors through Chapter 13 proceedings.
On March 24, 2015, the U.S. Supreme Court will hear oral arguments in two cases involving whether a debtor in chapter 7 bankruptcy may lien strip a second (or any junior) mortgage that is not secured by the home’s actual market value.
In Bank of America, N.A. v. Toledo-Cardona, No. 14-163, the market value of the chapter 7 debtor’s home was $77,689.00. The first mortgage owed to Quicken Loans had a balance of $135,703.00, and the second mortgage owed to Countrywide Bank had a balance of $32,000.00.
In Bank of America, N.A. v. Caulkett, 13-1421, the market value of the chapter 7 bankruptcy debtor’s home was $98,000.00, the Countrywide Financial first mortgage balance was $183,264.00, and the Countrywide Financial second mortgage balance was $47,855.00.
Thus, in each of the two cases, the homes were worth less than the balances owed on the homes’ first mortgages. This meant that the second mortgages were completely unsecured by any value. The chapter 7 debtors argued that under bankruptcy code section 506(a), the second mortgages should be declared avoided and stripped from the homes.
In each case, the Eleventh Circuit U.S. Court of Appeals approved the strip-off of the second mortgages, and the banks have appealed to the U.S. Supreme Court.
Chapter 13 bankruptcy debtors have long enjoyed the ability to lien strip wholly unsecured junior mortgages from their homes, but until recently, chapter 7 debtors have not sought the same benefit.
If the Supreme Court accepts the debtors’ arguments, then all chapter 7 debtors will have the right to strip off second mortgages when no actual value of the home secures that mortgage. Such a ruling might even allow debtors whose cases are closed to petition the courts for the same relief.
The oral argument on March 24, 2015, should be closely watched by anyone having an interest in stripping junior mortgages in chapter 7 bankruptcy.