United States Supreme Court Hands Defeat to Struggling Homeowners Who File for Bankruptcy

Underwater homeowners who file for Chapter 7 bankruptcy protection are still liable for secondary loans tied to their properties, the Supreme Court said on Monday. In a unanimous decision, the Court in Bank of America, N.A. v. Caulkett said that underwater borrowers, i.e., those who owe more on a mortgage than the home is worth — cannot void or “strip off” a completely unsecured junior lien when they file for Chapter 7 bankruptcy protection. A junior lien, such as a home-equity loan, is taken after a first mortgage, and uses the home as collateral for repayment of the loan. In Caulkett, two borrowers each had two mortgages on their homes, with Bank of America holding the junior liens. Both borrowers owed more on their first mortgages than their homes were worth and filed for Chapter 7 bankruptcy protection. The borrowers wanted to “strip off” the junior mortgages to eliminate those debts completely The Supreme Court, citing a decision from a 1991 case, Dewsnup v. Timm, that involved a partially secured claim, held that the lenders still have a secured claim, “regardless of whether the value of that property would be sufficient to cover the claim. The Caulkett decision is a [...]