Recently, on June 1, 2015, the United States Supreme Court decided the case of Bank of America v. Caulkett. This case drastically changes Bankruptcy law in Maryland, much to the benefit of banks who own second or subordinate mortgages, and much to the detriment of homeowners who have second loans and houses that are underwater.
Previously in Maryland, a debtor in a bankruptcy could eliminate the lien of a second mortgage if there was no equity to support that mortgage. This was known as a “strip off.” In other words, if a person owned a house worth $250,000, with a first mortgage of $300,000 and a second mortgage of $100,000, with a skilled attorney, they could strip off that second lien such that when they emerged from bankruptcy, the only lien on their property was the first mortgage of $300,000. However, if the house was worth $301,000, they could not strip any of the second mortgage off because it was partially secured by the house.
The Caulkett case changes this all around. The Court revised its perspective on what an “allowed secured claim” is. Before, a claim could not be secured if there was no equity securing it. This requirement has been eliminated by the Supreme Court. Now, according to this case, a second mortgage cannot be stripped off at all under this situation as long as it is an allowed secured claim. This change in direction for the Court is very beneficial for these subordinate lienholders.