Supreme Court : No Strip Off of Second Mortgage

On June 1 The Supreme Court decided Bank of America vs Caulkett .  This decision will prevent a homeowner from removing a completely underwater second mortgage from the home through a Chapter 7.  This is not a change in a law in Ohio nor is it a change in the law for most of the country. There have only been a few states where this was allowed and that is why the Supreme Court reviewed the law.  Consumer Bankruptcy Lawyers where hoping to see the law change.

It is important to note that debtors in a Chapter 13 can still Strip Off or Remove Second Mortgage completion of the case. 

What the Supreme Court decide:

Homeowner files Chapter 7 and these are the facts:

  1. House is worth $100,000
  2. First Mortgage payoff is $102,000
  3. Second Mortgage payoff is $ 30,000

Looking at the above picture you see that the first mortgage payoff is more than the house is worth.  Therefore there is no equity (value) in the house to be used to find the Second Mortgage is secured.  The Supreme Court said that did not matter for purposes of a Chapter 7 bankruptcy.  Debtors could not strip off or remove the second mortgage in a Chapter 7.

It is amazing to read these new reports that make it seem as if a homeowner can never strip off a second mortgage in bankruptcy.  Some other reporters got it wrong too including the WSJ

However the same homeowner could still file a Chapter 13 and get the second mortgage removed and discharged upon completion of the Chapter 13. 

This is very complicated.  This is an option you should  review with a bankruptcy attorney.