Until now, an Orlando chapter 7 bankruptcy has not done much to help a homeowner with an unsecured, or “underwater,” second mortgage on their property. (These mortgages are also commonly known as HELOCS, or Home Equity Lines of Credit.) In an Orlando chapter 7 bankruptcy, the courts have refused to remove a second mortgage lien, even though the chapter 7 bankruptcy eliminates all mortgage debts. Even after the chapter 7 bankruptcy is over, and the homeowner is granted a discharge of all debts, including mortgage debt, the mortgage liens remain on the property until the lender is repaid. (First mortgage liens can never be removed in a chapter 7 bankruptcy).
Removing a second mortgage, known to bankruptcy lawyers as “lien stripping,” has been available to homeowners who seek relief in a Chapter 13 bankruptcy. In a chapter 13, if the balance of the first mortgage is higher than the fair market value of the house, then there is no value left to secure the additional mortgage. In these circumstances, the court re-classifies the second mortgage lender as an un-secured creditor, like a credit card company. When the homeowner successfully completes a 3 or 5 year plan, the home is free of the mortgage lien. This is a significant benefit to the homeowner, but until now it has only been available in a chapter 13 bankrutpcy. Orlando bankruptcy lawyers, including myself, have simply been unable to help their chapter 7 clients with unsecured, or “underwater,” mortgages.
A new decision by the 11th Circuit Court of Appeals (which oversees all Florida bankruptcy courts) says that homemowners can strip a mortgage lien in a chapter 7 bankruptcy. In In re McNeal, the court ruled that a homeowner may eliminate the second mortgage if the value of the property is less than the balance of the first mortgage debt. Just like a chapter 13 lien strip, the mortgage is removed from the property if the homeowner can prove that the second mortgage debt is not secured by the home.
This is a very important development in the law for homowners who are trying to survive the mortgage crisis and the extended downturn in the economy. This decision makes an Orlando Chapter 7 bankrutpcy much more appealing to homeowners who want to keep thier homes while discharging unmanageable debt.