Florida Circuit Court Rules That Second Mortgages Can Be Stripped During Chapter 7 Bankruptcy Proceedings

A ruling by the Eleventh Circuit Court of Appeals in Florida allows underwater homeowners to eliminate and “strip-off” second mortgages through the Chapter 7 bankruptcy process.

A homeowner is considered “underwater” when he or she owes more on the property than it is worth. If a property’s value is less than the total amount that is owed to one or more lien holders, in a Chapter 7 bankruptcy by the borrower, the creditors with liens in excess of the property’s value will lose their status as a secured creditor as to the portion of the debt owed to them that is in excess of the property’s value. This occurs because the property is no longer valued high enough to create a security interest. A mortgage that has become unsecured, due to insufficient equity in the property can be stripped off through a Chapter 7 bankruptcy proceeding by the borrower. The homeowner’s liability for payment of the amount that has been stripped off is eliminated in the Chapter 7 bankruptcy. Although this case involved a second trust deed, the same analysis could be applied to a lien for unpaid dues and assessments that are owed to a homeowners association.

The ruling in this Eleventh Circuit case conflicts with rulings from other jurisdictions that have previously rejected the concept of stripping mortgages in a Chapter 7 bankruptcy proceeding. Underwater homeowners considering stripping unsecured liens should consult experienced bankruptcy counsel in their jurisdiction for an evaluation of the facts and law relating to their particular case.

See case decision: In re McNeil