A Florida Chapter 7 Filing May Now Eliminate a Second Mortgage

For many in the Orlando area it has become common to owe more on your home than it is currently worth. A recent decision out of the Eleventh Circuit Court of Appeals offers a new avenue of relief for struggling homeowners who may soon face foreclosure.

In McNeal v. GMAC Mortgage, LLC, the court found that in a Chapter 7 bankruptcy an individual can “strip off” a junior lien. The bankruptcy term “strip off” means that an unsecured lien is removed in its entirety.

What is an Unsecured Junior Lien?

A homeowner purchased a home for $200,000 in 2004 and financed $165,000 through a mortgage. The value of the home increased and in 2006, the homeowner consolidated debts with a second mortgage of $40,000.

In 2012, the home is now valued at $150,000. The homeowner owes $158,000 on the first mortgage and $35,000 on the second mortgage. The second mortgage is a junior lien and is unsecured, because the house is no longer worth the amount owed on the first mortgage.

How Does the Case Benefit Underwater Homeowners?

Prior to this case, an individual who was underwater and facing foreclosure could only strip a junior lien, such as a home equity line of credit or a homeowner’s association lien, with a Chapter 13 filing. The individual pays back a portion of the debt they owe under a three- or five-year plan in Chapter 13. Banks holding those junior liens receive a portion of what was owed and are treated similarly to other unsecured creditors.

In the past a homeowner might have needed to file a Chapter 13 solely to strip off junior liens and stave off foreclosure. But this may no longer be necessary. Now you may be able to strip off a second or third mortgage in a Chapter 7 bankruptcy. To see if you qualify you should consult with an experienced Orlando bankruptcy attorney.

The new case may help struggling Florida homeowners who may not have been able to afford a Chapter 13 bankrutpcy. Permitting lien-stripping in Chapter 7 cases will undoubtedly provide relief to a large number of underwater homeowners.

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