Contrary to popular belief, bankruptcy has many advantages. Such advantages include getting rid of debt that is not secured with a property, such as credit card debt, medical bills, and payday loans. With a Chapter 7 bankruptcy, one advantage is the potential to strip a second mortgage on a home. Stripping the second mortgage, or lien, means that the homeowner is no longer responsible for the debt of that particular mortgage, as that debt is discharged within the bankruptcy. It also means there is no debt and that property cannot be seized for nonpayment. This can remove a large financial burden from many families. This debt can never be revived and means that each month the homeowner no longer pays the monthly second mortgage payment.
However, some recent shake ups in the bankruptcy courts have had some bankruptcy attorneys and potential bankruptcy filers a bit nervous about the practice and fate of stripping second liens. Earlier in the year, the Eleventh Circuit Appeals Court upheld that people who filed for Chapter 7 bankruptcy could strip the second mortgage as long as the market value of the property was less than what was due under the first mortgage. For example, if the first mortgage is $300,000, and the fair market value of the home is $275,000 or anything less than $300,000, the second mortgage is eligible to be stripped.
Previously, the practice of stripping a lien was only available to bankruptcy clients who filed a Chapter 13 bankruptcy, which can be more expensive and complicated than a Chapter 7 bankruptcy. The appellate court stated that they would consider this issue again later this month with all court judges present. The bankruptcy court has put some motions for stripping second liens on hold until the appellate court revisit and rules on this issue.
Recently, an Orlando bankruptcy judge reported that the Eleventh Circuit Court chose not to rehear this issue for several months, and possibly not again at all. Based on this, the bankruptcy court made a decision to continue granting motions to strip second mortgages within a Chapter 7 bankruptcy. The bankruptcy court said that it would continue to okay the stripping of unsecured mortgages until they are directed otherwise by the appellate court.
With these decisions and actions by the courts, the stripping of second liens is in full swing for bankruptcy courts and those filing bankruptcy. It seems that the practice of getting rid of second liens on properties for homeowners will continue until or if they courts deem otherwise. This is promising news for anyone considering Chapter 7 bankruptcy.