Supreme Court Will Not Reconsider Bankruptcy and Underwater Mortgages
The U.S. Supreme Court recently declined to hear a case concerning underwater mortgages and liens on those properties in consumer bankruptcy cases. In declining to hear the case, The Court has left previous case law intact that says a debtor cannot strip down, or remove, a lien against an underwater mortgage through consumer bankruptcy. Our experienced Oak Park bankruptcy lawyers want to give you more information about the recent case and Supreme Court history on the issue.
Details of the Supreme Court’s Rulings on “Stripping Down”
In 1992, the U.S. Supreme Court heard the case Dewsnup v. Timm, in which it ruled that Section 506(d) of the U.S. Bankruptcy Code does not allow a debtor to “strip down” a lien to the “judicially determined value of the collateral.” That case involved an underwater mortgage, and the Court’s ruling made clear that a debtor cannot reduce the amount owed on a partially undersecured mortgage lien against the debtor’s home. In refusing to reduce the lien on Dewsnup’s property, the Court cited a pre-Bankruptcy Code rule. A number of years later, in Bank of America v. Caulkett (2015), the Court extended its ruling in Dewsnup further by clarifying that bankruptcy cases cannot eradicate liens on fully underwater mortgages.
To put all of that another way, a homeowner who files for bankruptcy cannot use the U.S. Bankruptcy Code to reduce an underwater mortgage, or to remove a lien entirely.
How the Court’s Decision Not to Hear a Case Will Affect Debtors
Recently, debtors asked the U.S. Supreme Court to reconsider its past decisions, arguing that the Court had previously misconstrued Section 506(d) of the U.S. Bankruptcy Code. The Court decided against revisiting its past rulings, suggesting that its decisions stand. In this recent case, Vasquez v. Wilmington Savings Fund, the debtors owed more than $240,000 on their mortgage and asked the court to strip down the lien.
After Hurricane Florence, the debtors were in a significant amount of credit card debt and were also facing hurricane damage to their home. Although they owed more than $240,000, the house was not even valued at $220,000. The debtors argued that, under Section 506(a) of the Bankruptcy Code, an “allowed secured claim” should mean the present value of the property. The Fourth Circuit, which heard the case on appeal, disagreed, and the U.S. Supreme Court declined to hear the case.
What does this mean for debtors? If you are filing for bankruptcy and have an underwater mortgage, it is unlikely that you will be able to reduce the amount of the lien against the property based on its actual value. If the Supreme Court will not reconsider previous rulings in Dewsnup and Caulkett, legislation will need to address the issue if the law is going to change.
Seek Advice from a Bankruptcy Lawyer in Oak Park
If you are planning to file for bankruptcy and have questions about how your filing will affect your mortgage, you should speak with an experienced Oak Park bankruptcy attorney as soon as possible. Contact the Emerson Law Firm for more information about how we can assist you.
See Related Blog Posts:
Possible Policy Change Concerning Student Loans and Personal Bankruptcy
Will Chapter 7 Bankruptcy Erase All of the Debt I Owe?
Details of the Supreme Court’s Rulings on “Stripping Down”
In 1992, the U.S. Supreme Court heard the case Dewsnup v. Timm, in which it ruled that Section 506(d) of the U.S. Bankruptcy Code does not allow a debtor to “strip down” a lien to the “judicially determined value of the collateral.” That case involved an underwater mortgage, and the Court’s ruling made clear that a debtor cannot reduce the amount owed on a partially undersecured mortgage lien against the debtor’s home. In refusing to reduce the lien on Dewsnup’s property, the Court cited a pre-Bankruptcy Code rule. A number of years later, in Bank of America v. Caulkett (2015), the Court extended its ruling in Dewsnup further by clarifying that bankruptcy cases cannot eradicate liens on fully underwater mortgages.
To put all of that another way, a homeowner who files for bankruptcy cannot use the U.S. Bankruptcy Code to reduce an underwater mortgage, or to remove a lien entirely.
How the Court’s Decision Not to Hear a Case Will Affect Debtors
Recently, debtors asked the U.S. Supreme Court to reconsider its past decisions, arguing that the Court had previously misconstrued Section 506(d) of the U.S. Bankruptcy Code. The Court decided against revisiting its past rulings, suggesting that its decisions stand. In this recent case, Vasquez v. Wilmington Savings Fund, the debtors owed more than $240,000 on their mortgage and asked the court to strip down the lien.
After Hurricane Florence, the debtors were in a significant amount of credit card debt and were also facing hurricane damage to their home. Although they owed more than $240,000, the house was not even valued at $220,000. The debtors argued that, under Section 506(a) of the Bankruptcy Code, an “allowed secured claim” should mean the present value of the property. The Fourth Circuit, which heard the case on appeal, disagreed, and the U.S. Supreme Court declined to hear the case.
What does this mean for debtors? If you are filing for bankruptcy and have an underwater mortgage, it is unlikely that you will be able to reduce the amount of the lien against the property based on its actual value. If the Supreme Court will not reconsider previous rulings in Dewsnup and Caulkett, legislation will need to address the issue if the law is going to change.
Seek Advice from a Bankruptcy Lawyer in Oak Park
If you are planning to file for bankruptcy and have questions about how your filing will affect your mortgage, you should speak with an experienced Oak Park bankruptcy attorney as soon as possible. Contact the Emerson Law Firm for more information about how we can assist you.
See Related Blog Posts:
Possible Policy Change Concerning Student Loans and Personal Bankruptcy
Will Chapter 7 Bankruptcy Erase All of the Debt I Owe?
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