Relief from Second Mortgages: Second Mortgages Can Now Be Stripped During Chapter 7 Bankruptcy

Like many Florida homeowners, Lorraine McNeal owed more on her mortgage than what her home was worth.  Ms. McNeal found herself a part of the ever growing portion of U.S. residents who are considered to be “underwater” in their mortgages.  Although home prices have risen throughout Florida in recent months, they are still far from the peak market prices of 2008.  This great disparity between owed amount and worth of the home leaves many Floridians and individuals across the country literally drowning in debt they cannot relieve.

Seeking freedom from her overwhelming monetary burdens, Ms. McNeal filed for Chapter 7 bankruptcy.  During the bankruptcy process, she requested the court “strip off” her second mortgage.  The term “strip off” means to remove an unsecured loan entirely, making the debtor not liable for repayment of any kind.  In Ms. McNeal’s case, her home was subject to a first priority lien of $176,413.  She had a second mortgage in the amount of $44,444, and her home was valued at $141,416.  Ms. McNeal urged that because the primary lien exceeded the value of the home, the junior lien, held by GMAC Mortgage, LLC, was wholly unsecured and therefore could be stripped off under 11 U.S.C. § 506(d).  The District Court denied the motion, ruling that § 506(d) does not apply to Chapter 7 bankruptcies.

Ms. McNeal appealed the decision to the Eleventh Circuit—and it ruled in her favor.  In the case of In re McNeal, No. 11-11352 (11th Cir. May 11, 2013), the Eleventh Circuit found that, pursuant to an older case entitled Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989), debtors may strip wholly unsecured liens in Chapter 7 bankruptcy.  Previously, Florida courts had disallowed such actions, believing a case arising out of the U.S. Supreme Court overruled Folendore.

The McNeal decision places Florida in the minority of states which allow stripping off of second mortgages during Chapter 7 bankruptcy. Ordinarily, relief from second mortgages is only allowed through Chapter 13 bankruptcy.  The Fourth, Sixth, and Seventh Circuits have all held that junior liens cannot be stripped off under Chapter 7 bankruptcy.  Until recently, the McNeal decision remained unpublished, leading some Florida courts to elect not to follow the Eleventh Circuit’s opinion as it was merely persuasive.  Now, however, the opinion has been published and is binding on all Florida courts.

The McNeal decision is an extremely important one for Florida debtors.  The following as some key points to take away from the decision:

  1. You may now be able to entirely eliminate your second mortgage—if you are a Florida resident and owe more than your home is worth, you might be able to “strip off” your second mortgage using a Chapter 7 bankruptcy.  This means you are no longer liable for this amount and will never have to pay it back.
  2. Time is of the essence—recently, a petition for certiorari was filed in the Supreme Court requesting the Court address the issue of stripping away second mortgages in Chapter 7 bankruptcy.  Given the split between the circuits and the momentous impact of the issue on struggling homeowners nationwide, it is quite likely the Supreme Court will elect to decide the issue.  This creates uncertainty as to whether your ability to strip off your second mortgage using Chapter 7 bankruptcy will exist for long.  Therefore, it is important to act now.
  3. A knowledgeable Florida bankruptcy attorney can advise you on whether McNeal will offer you relief—to be eligible to strip off your second mortgage, you must meet certain requirements both under 11 U.S.C. § 506(d) and the general Chapter 7 bankruptcy guidelines.  A licensed, experienced Florida bankruptcy attorney will thoroughly examine your individual situation and find the best option for relief from debt for you.

Scott Law Group, PLC, has over 18 years experience in the field of bankruptcy law.  We are a team of dedicated professionals who strive above all else to protect our clients interests.  Call us today at (727) 754-5001 to find out how we can help you achieve financial freedom.