U.S. Supreme Court to review Eleventh Circuit ruling where Chapter 7 debtors are allowed to strip off second mortgages

By Alfred Villoch, III, Esquire, with Savage, Combs & Villoch, PLLC

On November 17, 2014, the United States Supreme Court granted a petition for writ of certiorari in two cases: Bank of America, N.A. v. Caulkett (In re Caulkett), 566 Fed. Appx. 879, 2014 U.S. App. LEXIS 9407 (11th Cir. Fla., 2014) and Bank of Am., NA v. Toledo-Cardona (In re Toledo-Cardona), 556 Fed. Appx. 911, 2014 U.S. App. LEXIS 9035 (11th Cir. Fla., 2014).  In both cases, the United States Court of Appeals for the Eleventh Circuit ruled that a Chapter 7 debtor could strip off a second mortgage when the home’s value fell below the amount owed on the first mortgage.
What that ruling means is, if you file bankruptcy and the second mortgage on your home is completely “underwater,” like many second mortgages after the recent housing bust, then you could keep your house subject to the first mortgage and strip off the second mortgage completely leaving the debt secured by that second mortgage to be discharged in the bankruptcy.  In the Toledo-Cardona case, the debtor kept his home and stripped off the second mortgage that had a value of over $100,000.00.  That is why Bank of America and other lenders are not pleased with the decision.
The Eleventh Circuit is the appeals court for all bankruptcy cases filed in Florida, Georgia, and Alabama.  This ruling is not the first Eleventh Circuit Court decision on this topic. The Eleventh Circuit previously ruled this way about mortgage stripping in Folendore v. U.S. Small Bus. Admin., 862 F.2d 1537, 1538-39 (11th Cir. 1989); and McNeal v. GMAC Mortg., LLC, 735 F.3d 1263, 1265-66 (11th Cir. 2012).
Bank of America seeks to convince the United States Supreme Court that the Eleventh Circuit ruling should be overturned in light of Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992), where the U.S. Supreme Court previously held that a chapter 7 debtor could not “strip down” a creditor’s lien on real property where the value of the property is less than what is due to be paid to the creditor.  Id. at 417, 112 S. Ct. at 778.  
The U.S. Supreme Court will likely hear the lien-stripping cases and make its decision in Spring 2015.  The ruling will likely unify a split among the Circuit Courts of Appeal.  The Fourth, Sixth, and Ninth Circuit Courts of Appeal have previously ruled opposite of the Eleventh Circuit and denied the debtor’s ability to strip off a second mortgage when the second mortgage is completely underwater.  The Supreme Court’s decision is one of great importance because it will affect debtor’s rights throughout the country, especially given that many second mortgages are still completely underwater after the housing bust beginning in 2007.  
If you know someone facing financial difficulties and/or foreclosure, please contact Savage, Combs & Villoch, PLLC, and speak to a qualified attorney who could provide you practical advice on important issues such as stripping junior liens in bankruptcy.  Please call for a free bankruptcy consultations today. 813-200-0013 or visit www.savagelaw.us!

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