US Supreme Court rules on 6/1/15 that Chapter 7 debtors CANNOT lienstrip a junior lien, even if that junior lien is completely under water, meaning there is not even $1 of equity available to pay the junior lien, after the senior lien(s) are paid in full
The U.S. Supreme Court on June 1, 2015, unanimously held in Bank of America, N.A. v. Caulkett that a chapter 7 debtor cannot "strip off" even a totally underwater mortgage under § 506(d), reversing the Eleventh Circuit. In so holding, the Court not only reaffirmed but extended its controversial decision in Dewsnup v. Timm, 502 U.S. 410 (1992), in which the Court had held that a chapter 7 debtor cannot "strip down" a partially underwater mortgage under § 506(d). Many observers had thought — especially after oral argument in Caulkett — that the Court might take this opportunity to overturn its much-criticized Dewsnup decision, or at the very least confine it to partially underwater mortgages. Instead, much as Mark Twain once quipped that "the reports of his death were greatly exaggerated," the reports of Dewsnup‘s demise proved premature. Writing for the Court, Justice Thomas concluded that "Dewsnup‘s construction of "secured claim" resolves the question presented here." The Court’s decision in Caulkett now indicates that mortgage liens are sacrosanct in chapter 7, irrespective of whether they are partially or totally underwater. Whether they will be so in chapter 13 remains to be seen, but mortgagees have a plausible argument to extend Caulkett there as well.