By: Marshall G. Reissman, Attorney at the Reissman Law Group, P.A.
The 11th Circuit Court of Appeals recently held that debtors in Chapter 7 bankruptcy have the ability to strip off their second mortgage on their homestead property if the first mortgage is greater than the value of the home. The ability to wipe out a second mortgage in bankruptcy was previously only available to debtors in Chapter 13 bankruptcy.
Prior to this decision, many practitioners, myself included, would have counseled individuals who wanted to remain in their home, but wanted to strip off a second mortgage to file Chapter 13 bankruptcy. A United States Supreme Court decision in Dewsnup v. Timm, held that a Chapter 7 debtor could not “cram down” a partially secured debt. Cramming down a debt deals with valuing secured property to its actual value as opposed to what is owed on the collateral. This is another big reason folks file Chapter 13 bankruptcy. Many courts interpreted this decision into Chapter 7 debtors not being able to strip off wholly unsecured junior lien.
The 11th Circuit applied its “prior panel precedent rule,” which states that a later court may depart from an earlier court’s decision ONLY if an intervening Supreme Court decision is “clearly on point.” Because the decision in Dewsnup only dealt with cramming down partially secured liens and not stripping off wholly unsecured junior liens, then the 11th Circuit holding in Folendore v. United States Small Bus. Admin remains controlling precedent in the 11th Circuit.
Basically, if a junior lien is allowed under the Bankruptcy Code and is also totally unsecured under the Code, it is also voidable in Chapter 7 bankruptcy under the Code. Please call us today to see if you qualify for relief under Chapter 7 bankruptcy and if you can strip off a second mortgage.
McNeal v. GMAC Mortgage, LLC (In re McNeal) (11th Cir. 2012)
Dewsnup v. Timm, 502 U.S. 410 (1992).
Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989).
11 U.S.C. Sec. 502
11 U.S.C. Sec. 506(a)
11 U.S.C. Sec. 506(d)