A unanimous June 1, 2015 ruling by the United States Supreme Court stated that, in Chapter 7 bankruptcy liquidation cases, the debtor may not void a second mortgage lien when the property is worth less than the first mortgage. The decision reversed previous rulings from a US bankruptcy court, a district court, and the 11th Circuit Court of Appeals.
In Bank of America v. Caulkett, the Supreme Court anchored its decision in its 1992 ruling in Dewsnup v. Timm. That decision stated that it was not permissible to reduce a first mortgage to the market value of the collateral property. In delivering the opinion of the court in the 2015 case, Justice Clarence Thomas wrote that, in a case involving a debtor’s liquidation of assets under Chapter 7, the debtor may not disencumber himself from obligations to a second mortgage if the creditor’s claim is secured by a lien and allowed under Section 502 of the Bankruptcy Code.
For a number of years, individual debtors filing for Chapter 7 bankruptcy were able to effectually void their second mortgages when the value of their first mortgages outstripped the value of their property. The theory that supported this process was that, because there was no longer any equity in the collateral property, the property was an unsecured debt and could be dismissed from the proceedings. A number of analysts of the BOA v. Caulkett decision observed that the crux of the matter involved the definition of “secured” versus “unsecured” claims, noting that the Supreme Court specifically found that Bank of America’s claim in the second mortgage was indeed “secured.” These analysts additionally pointed out that, due to this ruling, the number of Chapter 7 filings is likely to decrease.
BOA v. Caulkett does not preclude underwater homeowners from seeking to strip down unsecured second mortgage liens under Chapter 13 bankruptcy filings. A Chapter 13 filing, however, presents other logistical issues for debtors, including a higher cost.