Supreme Court Declines to Extend “Lien Strip” Rights to Chapter 7 Debtors

house abandonedIn my most recent blog post, I wrote about  Bank of America, N.A. v. Caulkett (575 U.S. _____) (2015) in which the Supreme Court considered whether, under §506(d) of the Bankruptcy Code, a debtor in a Chapter 7 bankruptcy can “strip off” a second mortgage on the debtor’s principal residence if the amount of debt owed for the first mortgage holder exceeds the current market value of the home.

I guess it should be no surprise that Court decided to protect the rights of the mortgage companies over the rights of homeowners who saw the value of their homes fall through the floorboards in the past decade.

While noting that the prior Supreme Court precedent, Dewsnip v. Timm (502 U.S. 410) (1992) has been very heavily criticized, the Court did not overturn that prior case. The Dewsnip case held that Chapter 7 does not modify the rights of secured creditors, whether or not there is equity in the collateral.

In technical terms, the Court concluded that the term “secured claim” means a claim that is secured by a lien on real estate (like a mortgage lien, for example).  The meaning, the Court said, is not dependent on whether there is equity in the real estate for the lien to attach to.

Finally, the Court explained, an “odd” and “arbitrary” result would be reached if the Court allowed the strip offs.  This is because the valuation a bankruptcy court places on a parcel of real estate would allow one debtor to strip off an entire unsecured junior mortgage, while the next debtor would be stuck with the entire second mortgage based upon one dollar’s difference in value.  And real estate valuations are always fluctuating.  Never mind that this has never been a problem for Chapter 13 debtors, who have been allowed to strip off second mortgages left and right.  And here in Cuyahoga County there has not been so much of a “fluctuation” in real estate values lately, more like a dead sprint downward.

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