Stripping an Unsecured 2nd Mortgage in Chapter 7 Bankruptcy. Can it be?

Previously, lien stripping was something that could only be done in Chapter 13. However, a recent opinion from the 11^th Circuit has changed that rule. Here, a Chapter 7 debtor in Georgia sought to strip off a second mortgage that was totally unsecured. The 11^th Circuit reversed the Bankruptcy Court. And, they found that the lien could be stripped off pursuant to the plain language of the Bankruptcy Code.

It is an old belief that the Supreme Court’s decision in Dewsnup v. Timm precluded a Chapter 7 debtor from stripping off a lien. However, the Supreme Court only addressed stripping down in Chapter 7. Stripping down is the process of reducing a secured claim to the value of the property it secures. There is a very clear difference between the two.

While this is a Georgia case, 11^th Circuit decisions are controlled in Florida; because Florida is part of the 11^th Circuit. Accordingly, it will be interesting to see how bankruptcy judges in our district rule when they face this new case law.

If you have questions about foreclosure, loan modification, bankruptcy, or other alternatives, please feel free to call my office at 954-484-9987, send an e-mail to emil@fleysherlaw.com, or complete the contact form below.