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Supreme Court Rules 2nd Mortgages on 'underwater' Homes Cannot be Voided in Chapter 7 Bankruptcy

Today the Supreme Court ruled - 2nd mortgages on 'underwater' homes cannot be extinguished, or “stripped off” as unsecured debt through Chapter 7 bankruptcy.

In the cases of Bank of America v. Caulket and Bank of America v. Toledo-Cardona, Florida homeowners had filed for Chapter 7 bankruptcy and had a second mortgage with Bank of America extinguished by a bankruptcy judge due to their homes were worth less than what was owed (underwater).

Bank of America appealed the bankruptcy judge's ruling for the two cases, but the 11th Circuit U.S. Court of Appeals upheld the bankruptcy court's decision in May 2014. Bank of America then appealed the 11th Circuit Court's ruling to the Supreme Court.

Justice Clarence Thomas, in delivering the opinion of the court, wrote that, "Section 506(d) of the Bankruptcy Code allows a debtor to void a lien on his property '[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.' 11 U. S. C. §506(d). These consolidated cases present the question whether a debtor in a Chapter 7 bankruptcy proceeding may void a junior mortgage under §506(d) when the debt owed on a senior mortgage exceeds the present value of the property. We hold that a debtor may not, and we therefore reverse the judgments of the Court of Appeals."

That ends the argument in Chapter 7 cases. Let's see if this adds clarity regarding Chapter 13 cases.

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