The U.S. Supreme Court reversed a lower-court decision allowing debtors to “strip off” underwater second liens in Chapter 7 bankruptcy, saying precedent required it to keep such mortgage claims intact.
Justice Clarence Thomas, caught between his usual adherence to the strict wording of statutes and the competing doctrine of stare decisis, ruled that a prior decision carved out an exception from bankruptcy law for mortgage liens.
The unanimous decision in Bank of America v. Caulkett is a victory for lenders who said it would be unfair to require them to give up potentially valuable claims simply because a home’s current value is depressed. It’s a defeat for consumer advocates who favor using bankruptcy to reduce the amount borrowers owe against their houses, although borrowers can still strip underwater second liens through the more costly and time-consuming process of Chapter 13 bankruptcy.