Can Bankruptcy “Strip Off” 2nd Mortgage

WASHINGTON (Reuters) – The U.S. Supreme Court on Monday handed a win to Bank of America Corp(BAC.N) by ruling that a second mortgage on an “underwater” home – one with a mortgage balance exceeding its current value – cannot by voided during bankruptcy.

On a unanimous vote, the court ruled against two homeowners, David Caulkett and Edelmiro Toledo-Cardona, in Florida, where many homeowners have struggled to pay their mortgages following the recent housing crisis.

Caulkett and Toledo-Cardona had both won before the regional appeals court that oversees Florida. The 11th U.S. Circuit Court of Appeals had ruled that homeowners in Chapter 7 bankruptcy can void – or in bankruptcy terms “strip off” – a second mortgage when the debt owed to the holder of the first mortgage is more than the property’s current value.

That means the lender loses its ability to foreclose on the property even if its value increases.

But Bank of America, which is the second mortgage holder in both cases, argued in court papers that the approach taken by the 11th Circuit was different than other appeals courts around the country.

The cases are Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, U.S. Supreme Court, Nos. 13-1421 and

14-163.

(Reporting by Lawrence Hurley; Editing by Will Dunham)

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