The United States Supreme Court held this week in Bank of America v. Caulkett that wholly unsecured second mortgages cannot be stripped in Chapter 7. “Wholly unsecured” means that the house is worth less than the first mortgage balance. “Stripped” means that the lien comes off the property records.
This case has little, if any, practical effect in Minnesota, because Minnesota was one of the last states to approve lien stripping in Chapter 13, and due to the cool reception and the long road that it took to get that through, nobody has even tried to strip second mortgages in Chapter 7 cases in Minnesota, to the best of my knowledge. And most of the cases around the country have not permitted it in Chapter 7 either, just a few courts had done so. The case involved that went up to the Supreme Court came out of Florida.
This case is limited to Chapter 13, although it is possible that its holding could be extended to Chapter 13 cases. But as of right now, all of the appellate circuit courts in the country that have ruled upon the issue, have permitted it in Chapter 13, and the Supreme Court only takes cases where there is a split in authority, so it is difficult to fathom how the rule of law could be changed in Chapter 13 cases.
It is still beyond question that Chapter 7 can discharge a homeowner’s personal liability on the second mortgage. So when a homeowner files bankruptcy but doesn’t pay the second mortgage, the second mortgagee has the right to foreclose, which they rarely enforce. Rather, they usually then just sit and wait for the house to be sold. And of course, homeowners who have already been foreclosed upon, whose second mortgage is coming after them for money, can of course get that obligation discharged in Chapter 7.