Bankruptcy is a long and complex process. Many of those who rely on taking advantage of bankruptcies have found a new wrinkle in their plans – debtors being able to shed second mortgages from their main dwelling. This sort of Chapter 7 mortgage stripping might be helpful for the consumer, but its long-term impact is currently unknown. As with so many major financial matters, it seems that the decision will come down to the courts. While the Court already seems to favor this move to allow mortgage stripping in Chapter 7 bankruptcy, it is important to remember that such issues are always more complex than they seem at first blush. After all, any issue that has money at its center requires careful examination.
In early 2013, the 11th Circuit Appeals court moved to allow Chapter 7 bankruptcy filers to remove the second mortgage from their homes if the home was “underwater”. This process has long been available for those who have filed the more laborious and intensive Chapter 13 bankruptcy, but a full panel of judges decided to come together to rehear this issue to re-evaluate this basic mortgage process. Re-evaluation of the mortgage stripping in Chapter 7 bankruptcy would put a halt to the practice, leaving many individuals with a second mortgage still responsible for their payments even after declaring bankruptcy. Upholding that ruling might cause a bit of chaos in the mortgage industry, as many lenders would suddenly find themselves holding second mortgages that would leave them not only exposed to massive potential losses, but leave in in a situation that would be largely dependent on the overall local housing market. Re-hearing the case, then, would have a major impact for many.
The current climate seems to be in favor of Chapter 7 mortgage stripping, especially as an Orlando bankruptcy judge has already stated that the court is unlikely to reconsider their early decision in the near future. This means that the court will likely allow the process to go forward unabated, allowing unsecured second mortgages to be continued to be stripped until some other ruling is made against it. This might be a boon for consumers, but the mortgage industry might be preparing to take a major hit. Where the future leads is currently unknown, but the truth of the matter is that Chapter 7 mortgage stripping is very real and the courts have made no move to stop it.