Underwater Property Owners Get Thrown an Anchor

By The Law Offices of Ronald H. Kauffman of Ronald H. Kauffman, P.A. posted in Equitable Distribution on Friday, June 5, 2015.

Divorce can be caused by fighting over financial problems. And Florida cities make up more than half of the “seriously underwater” areas. For couples treading water while holding crushing debt, this week’s U.S. Supreme Court case is like being thrown an anchor.

The U.S. Supreme Court just issued its opinion in Bank of America v. Caulkett. The issue was whether in a Chapter 7 bankruptcy, debtors can void a second mortgage when the home is worth less than the first mortgage: i.e. the value of the house is “underwater.”

David Caulkett’s Florida home was worth $98,000 when he filed for Chapter 7 bankruptcy, but he owed $183,000 on his first mortgage and $47,000 on his second.

David filed for bankruptcy and asked the court to rule that his second mortgage was voidable. It did. After losing in the District Court and 11th Circuit Court, Bank of America complained to the U.S. Supreme Court.

The U.S. Supreme Court followed its earlier decision, holding that a debtor in a Chapter 7 bankruptcy cannot void a junior mortgage when the debt owed on a senior mortgage exceeded the value of the home.

All is not lost though. I wrote an article about how underwater homes in Florida can still have significant value during divorces and separation. This is especially true if the parties are splitting, and want to immediately buy another homestead.

One of the largest exemptions Florida homeowners are entitled to is the homestead exemption, which can shield up to $75,000 of the value of a home before its taxable value is determined.

The “Save Our Homes” Florida Constitutional Amendment caps any increases in your home’s assessment to the lower of 3% of the assessment for the prior year, or the percent change in the Consumer Price Index.

Before 2008, the cap ended when you sold your home. But in 2008, Florida voters approved Constitutional amendment 1allowing homeowners to keep a portion of their cap differential, and transfer that portion to a new homestead.

The Caulkett case could dampen the ability of divorcing couples to sell, refinance, renegotiate mortgages, get HAMP workouts or ask for principal forgiveness. Worse still, in Florida a bank can get a deficiency judgment if the house sells for less than the amount owed.

For a great in-depth analysis of Bank of America v. Caulkett, read Amy Howe’s articles at SCOTUSblog.