One of the advantages of filing for Chapter 13 bankruptcy was that it allowed for a homeowner to “strip” their second mortgage. If the homeowners were underwater on their first priority mortgage, meaning they owed more on that loan than the home is worth, chapter 13 bankruptcy provided a process for those homeowners to remove their second loan. The homeowners would propose a chapter 13 payment plan and then file a motion to eliminate the second mortgage as part of the plan. Upon completion of their chapter 13 plan, the second mortgage would be discharged along with their unsecured debt.
Until now Courts have not allowed a debtor to strip a second mortgage in Chapter 7 Bankruptcy. The Eleventh Circuit Appeals Court, which controls the law in Florida bankruptcy courts, just issued a decision permitting a debtor to remove their second mortgage in Chapter 7 bankruptcy. The case is In Re: Mcneal, 11-11352
There are several advantages to being able to strip a second mortgage in Chapter 7 bankruptcy rather than Chapter 13. Usually, a debtor can receive a discharge in Chapter 7 in only a few months while most Chapter 13 payment plans take 3 or 5 years. A debtor also pays less money in Chapter 7 than they would in Chapter 13. Not all debtors though can qualify for Chapter 7 though as there is a “means test” in order to be eligible. Chapter 13 is also a better option than Chapter 7 if the Debtor has a lot of non-exempt assets which might need to be surrendered in a Chapter 7.
Jonathan Bierfeld is an attorney with Martin Law Firm, P.L., whose practice focuses in Bankruptcy Law and Civil Litigation. He is admitted to practice law in the State of Florida and the Federal Court for the Middle District of Florida. He primarily practices in Lee County Florida in Cape Coral and Fort Myers, Florida.