Sunday, July 15, 2012
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 Country; 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 Courts within the 11th Circuit issued opinions stating exactly that. Third, the 11th Circuit's 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. The Question still remains as to whether this decision survive and spread to other Circuits.
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, many Floridians will be busy stripping liens.
The implications are this decision 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. Now in the Middle District of Florida, if a person is eligible, they can file a Chapter 7 bankruptcy and be completely done in 6 months. Many will want to take advantage of this scenario. It may be the deciding factor that makes retaining a families home financially viable. 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.