Tuesday, April 16, 2013

Chapter 7 lien stripping in Georgia

Stripping off a second mortgage in Chapter 7 bankruptcy has come to Georgia. Nationwide, it has been generally understood that a wholly unsecured second mortgage can be stripped off in a Chapter 13 case but not in Chapter 7. Law professor types have argued that there is no theoretical reason that the concept should not apply in Chapter 7, and the courts might be coming around.

The concept is this: A lot of homes these days are "underwater," or worth less than the amount of debt against them. In some cases where there are two mortgages, the home might be worth less than the amount of the first mortgage. The first mortgage holder has senior priority, and then the holder of the second mortgage (such as a home equity line of credit) has junior priority. If a first mortgage is $200,000, and the second mortgage is $25,000, but the house is only worth $199,000, then the second mortgage is wholly unsecured. In Chapter 13 bankruptcy, the debtor can use a procedure to strip off this lien, meaning that it can be voided so that the debtor can keep the house and never have to pay back the second mortgage.

This procedure is now tentatively available in Georgia. The Eleventh Circuit Court of Appeals, whose territory includes Georgia, allowed something like this in a case called In re McNeal, Case No. 11-11352 (filed May 11, 2012 in the 11th Cir.). One Georgia bankruptcy judge has followed this reasoning in another case called In re Malone, Case No. 12-61289 in the Bankruptcy Court for the Northern District of Georgia. However, the Eleventh Circuit did not publish its opinion, meaning that in the court's rules this case cannot be used as precedent to bind lower courts to its holdings in that decision. Neither is the Northern District of Georgia bound by any of its own decisions. This means that Chapter 7 lien stripping might be available on a case by case basis, at least until the Eleventh Circuit or the Supreme Court of the United States squarely addresses the issue.

For further reading: 11th Circuit Allows Mortgage Lien Stripping in Chapter 7 Cases (Nolo's Bankruptcy, Debt & Foreclosure Blog).