In June 2006, Caulkett purchased a archetypal “80/20” accommodation from Countrywide Financial (now allotment of Bank of America), absolutely financed with no money down, with 80 percent as a aboriginal mortgage and 20 percent as a second. In 2013, he filed for Chapter 7 bankruptcy. The home was admired at $98,000, but Caulkett owed $183,264 on aloof the aboriginal mortgage, and $47,855 on the second. The defalcation adjudicator in the 11th Circuit bare off the abandoned additional mortgage, but Bank of America appealed, arguing that Dewsnup additionally applies to this additional mortgage, which they say cannot be aished beneath Chapter 7.
The acumen it affairs that you can band off a additional accommodation in Chapter 13 defalcation but not Chapter 7 is that Chapter 7 is a abundant added affordable allotment of the defalcation code. “Chapter 13 has a acquittal plan, you alone get the strip-off if you complete the plan,” said defalcation able Bob Lawless. Alone about 40 percent of Chapter 13 cases complete the acquittal plan, which is three times as big-ticket as in Chapter 7. In cases area debtors accept a additional mortgage—and a ample cardinal were awash during the apartment bubble—Chapter 7 would be finer bare to them unless Caulkett prevails.
That’s because of what happens afterwards bankruptcy. Bank of America argues that the additional mortgage should abide an “allowed anchored claim,” captivation assimilate its affirmation on the acreage behindhand of the accompaniment of the aboriginal mortgage. Subsequently, the additional mortgage holder would accept “hostage value.” Even if the debtor wants to appear to a accommodation modification or abbreviate auction on the aboriginal mortgage, the additional mortgage holder could block it, and appeal a adjustment payment, basically a bribe, to accomplish their affirmation go away. This creates a admired asset out of article with no value.
Supporters of Caulkett altercate that the anchored affirmation of the additional mortgage becomes apart aback the abode is so far underwater as to accomplish it worthless. Beneath bankruptcy, the buyer of the additional mortgage can go in and try to appearance value, and accept some akin of payment. But beneath Chapter 13, they don’t accumulate the lien, and beneath this argument, they shouldn’t in Chapter 7 either. “Back in the day there was this cerebration that it’s property, we amusement it differently,” said Bob Lawless, who wrote an amicus abrupt in the case. “In a ambience area the affirmation has no value, the cipher should appropriately acquiesce the cloister to accomplish that affirmation go away.”
Second mortgages accept aerial absorption ante absolutely because of the inferior attributes of their accessory claim, and the accident of accepting annihilation aback in a foreclosure. “Applying Dewsnup to cases involving wholly underwater second-lien mortgages would accept the abnormal aftereffect of enabling (Bank of America) to do bigger in defalcation than it would at accompaniment law,” wrote Adam Levitin, law assistant at Georgetown University, in his amicus brief.
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