On Monday, June 1, 2015, the Supreme Court of the United States published its opinion in the matter of Bank of America v. Caulkett. The issue determined was whether or not, in a bankruptcy liquidation (Chapter 7 proceeding), the debtor can void a second mortgage when the property (typically the home) is worth less than the first mortgage. The Court ruled they cannot.

For years, individual Chapter 7 debtors have routinely stripped down their second mortgages completely under the theory that since there was no equity in the collateral (usually a debtor’s home), then it was unsecured and hence dischargeable as an unsecured debt. This left second mortgagees without any collateral post-discharge. The Court’s decision this week has changed all of this.

The Justices relied directly on a 1992 decision (Dewsnup v. Timm). A unanimous Court followed Dewsnup, in which the Court had ruled that when the amount of a mortgage lien is greater than the market value of the property at issue, the Bankruptcy Code does not allow courts to reduce the lien’s value to the property’s market value.

Continue Reading SCOTUS: Second Mortgages NOT Voidable In Chapter 7 Proceedings (Caulkett Decision)