Court Strips Second Mortgage In Chapter 7 Bankruptcy. Is It Precedent?

Another bankruptcy attorney emailed me asking me for my opinion about a case where an Orlando bankruptcy judged permitted a Chapter 7 debtor to "strip" off a second mortgage on their homestead. The law as I understood it was (and is) that only Chapter 13 debtors can use bankruptcy to strip a second mortgage lien off their homestead. The second mortgage is removed when the debtor successfully completes the Chapter 13 assuming that the house value is equal to or less than the first mortgage balance.

I looked up the case the attorney referred to. Sure enough, it was a Chapter 7 bankruptcy, and the judge issued an order stripping a second mortgage from the residence. The judge did not write an opinion explaining the order. There was no objection filed by the second mortgage lender.

I don’t accept this order as precedent. I think the judge’s office made a mistake. The law is clear on this issue. A second mortgage can be stripped only in a Chapter 13 case. That there was not lender objection and no written opinion suggests that this order was entered in error.

If a debtor’s attorney submits an order with a 20 day negative notice (any party has 20 days to object or the order will be granted) , and no party objects, the judge’s office will draft an order approving the motion and present it to the judge for signature. I think in this instance the judge’s office saw an order to strip a second mortgage with a routine negative notice, did not catch the fact that it was a Chapter 7 proceeding, and drafted an order approving the motion for the judge. If the judge understood that this was a Chapter 7 case, the judge would have written an opinion explaining why the mortgage could be stripped from the homestead.

This case may be a windfall for this debtor. Debtors may get in trouble with the court if they try to "slip by" a strip motion in a Chapter 7 bankruptcy.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Comments

[Tye Van Buren]

This case, In re Montero, was not routine. In fact, there was a Trustee objection and lengthy Order and opinion on another issue, as well as a certified question to the FLSCT. Is the law clear? What is the Supreme Court case that CLEARLY lays it out? (not Dewsnup because it was a strip down case, not a strip off, and it was explicitly confined to its facts.)

[celimar]

Is there a way to monitor if this "mistake" has happen on several ocassions. Could it be some presedent that some judges are trying to create in Florida due to the millions of homes going to foreclosure. This way more people could keep their homes.

[Zeshan Usman]

Who was the second mortgage lender?