Elimination of Second Mortgage Through Bankruptcy

A recent case decision was handed down by the 11th Circuit Appeals Court which will make it possible to eliminate a person’s second mortgage on an underwater property through bankruptcy.

Before this case was decided, before homeowners could only strip off their second mortgage in a Chapter 13 bankruptcy if their house was worth less than what they owed on the first mortgage balance. The client would file a Chapter 13 bankruptcy and then file a motion to wipe out the second mortgage as part of the plan. In most cases, Chapter 13 plans last 3 to 5 years. If the client completes the Chapter 13 plan to the end, the court would issue an order stripping the second mortgage lien from the debtor’s residence. Courts have not allowed Chapter 7 filers to strip second mortgages- until now.

This month, the 11th Circuit Appeals Court delivered a decision which allows Chapter 7 filers to get rid of unsecured second mortgages. The Appeals Court decision is the controlling law in Florida’s Federal bankruptcy courts.

This is a monumental decision that can have huge advantages for clients. Imagine getting rid of your second mortgage for only a couple thousand dollars (income restrictions apply)? The mortgage elimination occurs through the Chapter 7 discharge which is issued about 90 days after filing. The Chapter 7 client does not have to complete a five year payment plan to get rid of his second mortgage. Also, Chapter 7 bankruptcy is much easier and inexpensive than a 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

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