New Ruling: Second Mortgages Can Be Stripped in Chapter 7

The Eleventh Circuit Court of Appeals has ruled that Second Mortgages can now be “stripped” in Chapter 7 cases. This means that as long as the amount owed on the first mortgage is greater than the home’s market value, the second mortgage becomes unsecured and can be discharged in the bankruptcy with the remaining unsecured debt.

Previously, second mortgages could only be “stripped” in Chapter 13 cases because the courts felt that 11 USC §506(d) did not apply in Chapter 7 cases because of an old Supreme Court Decision. However the Court of Appeals felt that although the Supreme Court expressly stated that §506 didn’t apply in Chapter 7 when it came to partially secured “cram downs” of primary residential property, the Supreme Court did not formally make an opinion on whether or not §506 will apply to Chapter 7 cases in other ways.

I must admit that this feels like a weak decision. Weak or no, someone will have to petition the Supreme Court on the issue, await the Supreme Court’s decision on whether or not to take the case and then await the Supreme Court’s final opinion on whether or not the statute applies within the Chapter 7 context. Long story short, this is probably going to take a long time to work out. Hopefully in the meantime, people can get the relief they need from unsecured second mortgages.

If you’d like to read the decision it is In Re McNeal, Case No. 11-11352.