Underwater Mortgages

There has been a great deal of talk since the start of the Great Recession in 2008 about underwater mortgages, meaning mortgages for which there is no collateral.  For example, Mr. and Mrs. Jones own a home worth $100,000.00 and have a first mortgage of $110,000.00 and second mortgage of $40,000.00.  The second mortgage of $40,000.00 is often referred to as “underwater.”    The United States Supreme Court in 1992 held that a chapter 7 debtor could not “strip down” a partially underwater mortgage.  A number of bankruptcy observers thought, and some federal courts agreed, that a bankruptcy debtor could strip off a fully underwater mortgage, such as the $40,000.00 referenced in this blog post.  However, on June 1, 2015, the United States Supreme Court in Bank of America, N.A. vs. Caulkett held that in chapter 7 no mortgage can be stripped off.  This ruling leaves bankruptcy debtors with the unhappy alternative of paying mortgages in full or simply walking away from the home.  While mortgage modification is possible, the bank process is often long and disappointing.  There still remains the open question of whether a totally underwater mortgage can be stripped off in chapter 13.  Checkett & Pauly has filed many chapter 13 cases over the years that have stripped off underwater mortgages in chapter 13.  Please call our office for a free appointment if you would like to discuss that alternative.