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
That’s a good decision for debtors chapter 7 bankruptcy cases in Florida and the Eleventh Circuit but I question the jurisprudence. It’s not surprising that the
McNeal
decision is unpublished and per curiam.
The plain language reading of
Folendore v. United States Small Bus. Admin.
may be more persuasive than the decision of the United States Supreme Court in
Dewsnup v. Timm
but that does not mean that
Folendore
survives
Dewsnup
. The
Dewnsup
decision determined that 11 U.S.C. § 506 was ambiguous and the Court resolved that ambiguity by determining that the lien rights of holders of junior, consensual liens survived a chapter 7 discharge.
Courts of Appeal have a duty to follow decisions of the United States Supreme Court and the “you didn’t say Simon says” reasoning of
McNeal
ignores that duty.