Wholly Unsecured Second Mortgages in Chapter 13 Bankruptcies

BREAKING NEWS: You may not be able to strip-off Wholly Unsecured Second Mortgages in Chapter 13 Bankruptcies for much longer..
by: Jonathan Goldsmith Cohen
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Presently, if you owe more on your first mortgage than your home is worth, you can strip-off your second mortgage in a Chapter 13 bankruptcy. The Bank’s junior mortgage liens are thus wholly underwater: because the home is worth less than the amount owed on the senior mortgage, the Bank would receive nothing. When the Chapter 13 is discharged, your second mortgage is treated like general unsecured debt such as credit card debt or medical debt and forgiven. When you go to sell your home, you are now only responsible for paying off the first mortgage. Strip-offs, or cramdowns as they are also known, are a terrific tool to deal with a wholly unsecured second mortgage.

You may not be able to file a Chapter 13 bankruptcy and do a strip-off for much longer though. Today, the United States Supreme Court in Bank of America, N.A. v. Caulkett, held that a debtor in a Chapter 7 bankruptcy may not void a junior mortgage lien when the debt owed on a senior mortgage lien exceeds the current value of the collateral and is properly recorded.

The days of filing Chapter 13 cases to strip-off a second mortgage may be limited because the court in Caulkett took the position that stripping off a mortgage can be a pretty arbitrary process. The court took the time to note how shifting real estate values can make getting a strip-off a matter of the subject property being worth a $1.00 less than the first mortgage balance. This same logic of valuation applies in Chapter 13 cases as it applies in the Chapter 7 cases which the court analyzed in Caulkett.

The takeaway: Do not wait to file a Chapter 13 bankruptcy to strip-off your second mortgage! Banks may see the Caulkett case as a way to argue against strip-offs in Chapter 13 bankruptcies.