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Lender seeks to overturn decision that allows debtors to “strip off” second mortgages

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is Chapter 7 Bankruptcy?”


Bank of America has litigated its objection to the discharge of second mortgages in Chapter 7 bankruptcies all the way to the United States Supreme Court.

Bank of America Charlotte Mecklenburg Chapter 7 Lawyer North Carolina Chapter 13 AttorneyBanks loan money to people who then use the money to buy a home. In exchange, the borrowers agree to repay the money, and if they do not, their lenders can take possession of their home through a process called foreclosure. Some homeowners take out second mortgages. Many of these second mortgages are called “home equity lines of credit” and are reserved for borrowers whose home value exceeds existing or countenanced loan amounts.

Although lenders in second mortgages have the right to foreclose on properties if borrowers default, their rights are secondary to those of first-mortgage holders, meaning if borrowers go bankrupt, second mortgage lenders often lose their lien rights on a property.

In the run-up to the Great Recession, which officially ended in 2009, home values in states like Florida, New York, Nevada and California became inflated, and millions of borrowers undertook mortgage loan obligations that exceeded the value of their homes, once the housing market “corrected” and housing values began to tumble.

This left many borrowers “under water” on their mortgages, meaning that even if they sold their homes for full value, they would still owe money on their mortgages.

Almost one-third of mortgaged homes in the state of Florida are worth less than their market value, according to Realty Trac, a real-estate research company that compiles and publishes statistics about the housing market nationwide.

Two bankrupt Florida homeowners, David Caulkett and Edelmiro Toledo-Cardona, sought to have second mortgages “stripped off” in their bankruptcy, since the amounts owed on their first mortgages exceeded the value of their homes. Bankruptcy courts in the Caulkett and Toldeo-Cardona cases allowed the stripping away of second mortgages, a result that was affirmed by the regional appeals court that oversees Florida and the 11th Circuit Court of Appeals in Atlanta.

Bank of America has argued that hundreds or perhaps thousands of homeowners in states within the jurisdiction of the 11th Circuit Court of Appeals—Alabama, Florida and Georgia—have now moved to void second mortgages. The bank asked the Supreme Court to take up the case because, it says, the 11th Circuit’s ruling is in conflict with Supreme Court precedent and with every other appellate court that has considered the issue.

The issue in the Caulkett and Toledo-Cardona cases is only applicable in Chapter 7 bankruptcy proceedings. Called bankruptcy “liquidation” proceedings, Chapter 7 actions typically result in a discharge of most of bankruptcy filers’ debts.

If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.









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