Landmark Bankruptcy Decision Allows Second Mortgage Strip in Chapter 7

A recent decision by the U.S. Court of Appeals for the Eleventh Circuit marks a major milestone for homeowners in Chapter 7 bankruptcy by allowing debtors to strip off a wholly unsecured second mortgage. In its order entered on May 11, 2012 in McNeal v. GMAC Mortgage, et al., the court upheld a 1978 decision declaring a wholly unsecured claim as voidable under section 506(d) of the U.S. Bankruptcy Code. In doing so, the court also rejected rulings by other federal circuit courts that refused to allow debtors to strip off second mortgages in Chapter 7 bankruptcy, even if the value of their home was equal to or less than the amount owed on the first mortgage. Those courts relied on the United States Supreme Court’s decision in Dewsnup v. Timm, 112 S. Ct. 773 (1992), which held that a Chapter 7 bankruptcy debtor could not strip down a partially secured lien under section 506(d) (rather than an entirely unsecured lien).

Before this decision, the prevailing sentiment among bankruptcy attorneys in Florida and throughout the country was that second mortgages could only be stripped off (entirely discharged) in Chapter 13 bankruptcy. The 11th Circuit’s decision in McNeal allowing debtors to do so in Chapter 7 bankruptcy will afford many more homeowners additional relief from their overwhelming debt.

The bankruptcy attorneys at PERENICH The Law Firm have decades of experience helping individuals and companies find options and solutions to their financial issues during these difficult times. These may include discharging unsecured debt such as credit cards and stripping off second mortgages in Chapter 7 bankruptcy, reorganizing in Chapter 11 bankruptcy, and paying down all or a portion of their debt while discharging other debt in Chapter 13 bankruptcy.