Chapter 7 lien stripping a new possibility

We know that you can strip a completely unsecured second mortgage lien in Chapter 13 bankruptcy. However, at least one court (the 11th Circuit Court of Appeals) has ruled that you can strip a second mortgage after filing Chapter 7 bankruptcy, and it looks like the U.S. Supreme Court will decide whether that applies to the whole country.

In Bank of America v. Caulkett, the creditor is appealing the 11th Circuit’s decision that second mortgages can be stripped when they’re completely unsecured, meaning that the balance of the first mortgage is above and beyond the value of the house, such that if the house were to be sold or foreclosed, the second mortgage lender would get nothing.

A 1992 case called Dewsnup v. Timm  has been the law of the land, and Dewsnup held that a partially unsecured second mortgage could not be wiped out in either Chapter 7 or Chapter 13 bankruptcy. In oral argument, the Supreme Court justices seemed to be considering overruling Dewsnup, which would be even a step beyond the 11th Circuit’s decision.

The Supreme Court’s decision is expected to be released later this Spring. If the justices uphold the 11th Circuit, expect more bankruptcy cases to be filed for borrowers who are underwater on second mortgages.