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

02.06.2015 by Law Firm of Seglund Gabe Pawlak & Groth in 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 clear victory for mortgage lenders and clarifies the path to recoveries for second lien holders. On the other hand, this decision will undoubtedly make the bankruptcy process more difficult for borrowers seeking bankruptcy protection.



Michigan Legal Solutions

At Seglund Gabe Quinn Elowsky & Pawlak, PLC we have helped area entrepreneurs and business owners build a solid legal foundation for long term success. Our attorneys are trained and experienced in business law, and understand that businesses built on a strong legal foundation have a better chance for long term growth and success. Many of the business relationships that our firm has established have lasted more than a quarter of a century, thanks to the skill and determination of our business attorneys who are dedicated to the success of our clients’ enterprises. Let us help you live out your dreams by being the law firm you call on when you start you own business or when your business needs assistance.

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