Chapter 7 debtor cannot strip wholly unsecured 2nd mortgage

In the important case of Bank of America, N.A. v. Caulkett, 135 S. Ct. 674 – 2014, the US Supreme Court has held that debtors in a Chapter 7 bankruptcy proceeding may not void a wholly unsecured junior mortgage lien under 11 U.S.C  §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the credi­tor’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code.   The Court overruled and reversed the Eleventh Circuit decision  rendered in McNeal v GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012) which allowed wholly unsecured liens to be stripped.

The Supreme Court ruled that  §506(d) does not permit bankruptcy courts to “strip off” completely unsecured junior mortgage liens on the property even if the value of the property acting as collateral is less than the amount the Chapter 7 debtor owes to the first (senior) mortgage holder.   In making its decision the Court extended on its ruling in Dewsnup v. Timm, 502 U.S. 410 (1992), which held that §506(d) does not allow a Chapter 7 debtor to “strip down” a partially mortgage lien to the current value of the collateral.

Chapter 7 Debtors are now left to look to filing for Chapter 13 or Chapter 11 reorganization plan to obtain the partial or complete lien strip that Dewsnup and Caulkett denies to a homeowner.

Read the complete decision here.

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