U.S. Supreme Court strikes down mortgage lien strips in Chapter 7 cases

On June 1, 2015, in a blow to homeowner’s rights, by a 9-0 decision in Bank of America v. Caulkett, the United States Supreme Court struck down a Chapter 7 debtor’s right to “strip”, or void, a junior mortgage lien on a home; even if there is no equity in the home to support the second or third mortgage lien.

Previously, if a debtor in a Chapter 7 bankruptcy proceeding owned real property which appraised for less than the balance on the first mortgage, the homeowner could seek a court order allowing release of the lien securing a second or lower priority mortgage loan.

While such relief is, at least for the time being, still available to debtors in Chapter 13 proceedings, debtors in Chapter 7 now face the difficult choice of keeping an underwater property, or surrendering it back to the lender.