A new court decision by the Federal Appeals Court for 11th Circuit (In re: McNeal, No. 11-11352, (11th Cir., May 11, 2012) ) allows individuals to eliminate a second mortgage and any other inferior liens on real property that are under-secured, in other words, upside down, by filing a Chapter 7 bankruptcy.
In the past, homeowners were only able to eliminate the second mortgage and other inferior liens, like past due amounts owed to Homeowner’s Associations, in a Chapter 13 bankruptcy, so long as they can demonstrate that their property is worth less than the first mortgage balance. The homeowner would file a Chapter 13 bankruptcy, submit a Chapter 13 payment plan, and then file a motion to eliminate the second mortgage as part of the plan. Most Chapter 13 plans last for five years. If the Chapter 13 debtor successfully completed his five year plan, the court would issue an order stripping the second mortgage lien from the debtor’s residence.
Chapter 7 Debtors were not afforded the same remedy until now. This month the 11th Circuit Appeals Court issued a decision which permits Chapter 7 debtors to strip unsecured second mortgages. This decision is controlling law in Florida bankruptcy courts.
There are several advantages of using Chapter 7 rather than Chapter 13 to strip a second mortgage. The mortgage strip is accomplished through the Chapter 7 discharge which is issued about 90 days after filing. The Chapter 7 debtor does not have to complete a five year payment plan to get rid of his second mortgage. Also, Chapter 7 bankruptcy is simpler and cheaper than Chapter 13.
Consult our law firm at 305.451.0013 for a confidential consultation. We will review your situation and provide you information on your legal rights, options and responsibilities.