Can second mortgages on underwater property be voided in bankruptcy? SCOTUS to decide
The U.S. Supreme Court has agreed to decide whether a second mortgage on an underwater house can be voided in bankruptcy.
The court accepted two cases from Florida on Monday involving second mortgages issued by Bank of America, report SCOTUSblog, the National Law Journal (sub. req.), Reuters, Courthouse News Service and Bloomberg News.
In a prior case, the U.S. Supreme Court ruled in 1992 that a debtor can’t avoid a creditor’s claim by having property “stripped down” to the current market value. At issue is whether the same rule applies to prevent debtors from “stripping off” a second mortgage when the property is worth less than the amount owed under the first mortgage.
Bank of America described the issue this way in one of its cert petitions (PDF): “This case presents the question whether, when a first mortgage on a chapter 7 debtor’s house is under-secured, so that a second mortgage is completely ‘underwater,’ the debtor may not only discharge his or her personal liability for the second mortgage loan, but also ‘strip off’ the lien itself, leaving the mortgage-holder without the right to foreclose on the property even if the value of the property subsequently increases.”
The cases are Bank of America v. Caulkett and Bank of America v. Toledo-Cardona.