A new court decision by the Federal Appeals Court for 11th Circuit makes it easier people to get rid of their second mortgage on upside down real property through bankruptcy.
Up until now, homeowners could strip off their second mortgage in a Chapter 13 bankruptcy if their house was 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. Courts have not permitted Chapter 7 debtors to strip second mortgages- until now.
This month the 11th Circuit Appeals Court issued a decision which permits Chapter 7 debtors to strip unsecured second mortgages. The Appeals Court decision controls the 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.
The decision said that people who have already filed Chapter 7 can take advantage of the decision and strip their second mortgage if their case has not been closed, even if they have already received a discharge. The case is In re: McNeal. 11-11352