A Chapter 7 Bankruptcy Debtor can strip a second mortgage in a Chapter 7 bankruptcy if they live in a jurisdiction under the 11th Circuit Federal Court of Appeals. Approximately two weeks ago, the 11th Circuit issued an opinion in In Re McNeal, Case No. 11-11352 (11th Cir., May 11, 2012) wherein it held quite simply that a Chapter 7 Debtor could strip a second mortgage during the Chapter 7 case. This is huge because everyone and I mean everyone did not believe this to be the case after the Supreme Court’s decision in the Dewsnup v. Timm case.
The McNeal case is rather surprising for several reasons. First, the 11th Circuit is not noted as being the most Debtor friendly Circuit in the Nation; however, that seems to be changing as the Court issued several Debtor friendly decisions this year in FDCPA cases. Second, everyone thought that this issue was dead after the Supreme Court issued the Dewsnup opinion. As a matter of fact, many Bankruptcy Court within the 11th Circuit issued opinions stating exactly this point, including the Courts that I practice in.
Third, and this was a kind of slap in the face by the 11th Circuit, was that the opinion was based upon a 1989 case, Matter of Folendore, and the Court explained that the Dewsnup case did not abrogate or overrule their precedent in Matter of Folendore, and therefore, Matter of Folendore was still good law.
Now, the real issue will be to see where this case goes next. Obviously, this issue is going to continue to heat up. There are several appeals pending right now in New York, Utah and Illinois. It may be five years before the cases get to the Supreme Court, but until then, we are going to get busy stripping liens down here.
If you think about it for a little bit of time, the implications are huge. In a Chapter 13 bankruptcy, a debtor can strip a second mortgage lien, there is no doubt about that. But, in order to truly get the benefits of the bankruptcy, you must wait to get your discharge, and that could take from three to five years. Ouch. Now, if a person is eligible, they can file a Chapter 7 bankruptcy and be completely done in 6 months.
Yes, that is what I said, completely done in 6 months. Who wouldn’t want to take advantage of that scenario? Chapter 7 bankruptcy is cheaper and quicker. A debtor doesn’t have to worry about filing a plan of reorganization that will have them under scrutiny for the next 5 years, etc, etc, etc. The benefits clearly outweigh the negatives on this issue.
We will definitely keep watching this issue here at the Bankruptcy Law Network.