On May 11, 2012, the U.S. Court of Appeals for the Eleventh District rendered its decision in the case of Lorraine McNeal v. GMAC Mortgage, LLC (In re McNeal) 2012 WL 1649853 (11th Cir. May 11, 2012). The Debtor in that case had filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code and then sought to "strip off" the second mortgage on her property. The Debtor's property was subject to a first and a second mortgage. The parties to the case agreed that the value of the home was less than the amount owed on the first mortgage.
The Debtor argued that since the second mortgage was wholly unsecured, it was void under section 506(d) of the U.S. Bankruptcy Code. The Debtor's Motion was denied, holding that a wholly unsecured second mortgage could not be "stripped off" using section 506(d). The Debtor appealed the ruling. However, the ruling was affirmed by the District Court.
The Debtor appealed again and took her case before the U.S. Court of Appeals for the Eleventh District. In a landmark decision for citizens in the Eleventh District, the Court of Appeals reversed and remanded the case, holding that under their ruling in Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989) a wholly unsecured second mortgage could be "stripped off" in a Chapter 7 Bankruptcy proceeding. The Court of Appeals for the Eleventh District's decision is in contrast to the decisions in other Courts of Appeals across the country. Those Courts have ruled that a wholly unsecured mortgage is not subject to a "strip off" in a Chapter 7.
Prior to this decision, it was commonly accepted that a Debtor could only "strip off" a second mortgage in a filing under Chapter 13 of the U.S. Bankruptcy Code. A Chapter 13 filing requires the debtor to enter into a monthly repayment plan for a period of 36 to 60 months and complete all monthly payments to receive a discharge. In contrast, a typical case under Chapter 7 of the U.S. Bankruptcy Code is concluded in 120 days from the date of filing and does not involve a repayment plan.
This present ruling will have a far reaching effect for filers in the Middle District of Florida. For debtors looking to "strip off" a wholly unsecured second mortgage, they will now have the option of doing so in a bankruptcy proceeding under Chapter 7 of the Bankruptcy Code rather than being forced to do so in a Chapter 13. This decision has the potential to enable thousands of Floridians to save their underwater homes from foreclosure. Floridians now have the opportunity to get a true fresh start and, hopefully, can begin to finally recover from the burst of the housing market bubble and subsequent recession.
If you are currently living in a home that is severely underwater and is secured by a first and second mortgage and you would like to learn more regarding this decision and how it may help you save your home, please contact The Law Office of Brian P. Buchert, P.A. at 813-434-0570.