Supreme Court issues important decision for Florida homeowners with a second mortgage
This article discusses second mortgages in bankruptcy in the wake of an important U.S. Supreme Court decision.
If you are considering filing for bankruptcy protection, you may have more than one mortgage on your home. Equity in a home is often the best means of getting additional short-term income. If financial circumstances do not improve, however, a second or third mortgage can mean that your home is significantly underwater.
Fortunately, bankruptcy does provide some options when dealing with second mortgages. Through a Chapter 13 bankruptcy, you may be able to remove the lien on your home and change your second mortgage into unsecured debt. This is called lien stripping.
U.S. Supreme Court case on lien stripping in Chapter 7 bankruptcy
Chapter 7 bankruptcy, however, treats a second mortgage differently. Historically, you could not strip a second mortgage through Chapter 7 protection. However, in 2012 the 11 th Circuit Court of Appeals, which includes federal cases out of Alabama, Georgia and Florida, had held that homeowners could strip their second mortgages when the remaining balance on their first mortgage was greater than the fair market value of the home. In other words, when you were underwater on your first mortgage your second can be voided in bankruptcy. According to the 11 th Circuit, the Bankruptcy Code allows a debtor to void a second lien on his or her property because the value of the bank’s interest in the property is zero (if the house sells for fair market, after all, the second mortgage holder would receive no proceeds from the sale).
However, on June 1, the U.S. Supreme Court overturned that decision. The nation’s highest court ruled that a homeowner could not void a junior mortgage even when the first mortgage is less than the market value of the home. The upshot is that Chapter 7 does not allow a homeowner to void a second mortgage.
Chapter 13 bankruptcy may provide a better option for homeowners
That means Chapter 13 may be the right option for you if you are struggling to pay a second or third mortgage and other debt. Through Chapter 13 bankruptcy, the filer’s debts are reorganized into a manageable payment plan that lasts three to five years. At the end of the payment plan, the remaining debts are discharged. You can keep your home in a Chapter 13 bankruptcy if you are able to make the monthly payments according to the bankruptcy plan.
Through lien stripping, a second mortgage becomes unsecured debt, so it is treated just like credit card debt and medical debt. In other words, Chapter 13 bankruptcy will allow you to pay what you can afford on your second mortgage, credit cards, and medical debt, and any remaining debt will be forgiven. The mortgage holder, usually a bank, will then have to give up the lien on your home.
Through Chapter 13 lien stripping, you may be able to get out from under debt – and save your home.
Contact an experienced bankruptcy attorney
This is a brief overview of lien stripping. The details of a Chapter 13 reorganization are complex. If you have questions about whether Chapter 13 is right for you, contact the experienced bankruptcy attorneys at Kingcade Garcia McMaken
Keywords: Second mortgage, mortgage lien, Chapter 7 bankruptcy, Chapter 13 bankruptcy, Florida homeowners, lien stripping.