Eleventh Circuit Rules On Allowing Lien Stripping in Chapter 7

UPDATE: Since the posting of this blog, the Supreme Court has reversed the Eleventh Circuit: 

See http://jacksonville-bankruptcy-grange.blogspot.com/2015/06/second-mortgage-in-chapter-7-bank-of.html

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Lien Stripping in a Chapter 7 case?  The 11th Circuit Court of Appeals says it is OK, which is a minority decision.

The 11^th Circuit Court of Appeals recently interpreted a Supreme Court ruling differently than most other courts in other jurisdictions. If you have been studying bankruptcy, then you know the courts require a discharge in a Chapter 13 as a prerequisite to stripping off of a lien to real property. So, what does this mean. Essentially, if you have a second mortgage that is completely unsecured (the balance of the 1^st mortgage is more than the value of the property, so the second mortgage is unsecured), the only way to get rid of the second mortgage is to obtain an order from the court allowing a strip off of the lien upon receiving a discharge in a Chapter 13.

 

Most courts around the country have interpreted the Supreme Court ruling as disallowing the strip off of a lien when it disallowed the cram down of a lien in a Chapter 7. Well, the 11^th Circuit (the Middle District of Florida is in the 11^th Circuit) court of appeals has just ruled a mortgage can be stripped off in a Chapter 7 bankruptcy. (In Re: Lorraine McNeal). The court said, for the most part, the Supreme Court has never ruled on a strip off of a lien, just a cram down, and as such, they are free to interpret this part of the bankruptcy code.

So, will the local bankruptcy courts follow the 11^th Circuit? We do not know. This case just came down. You see, even though the 11^th Circuit ruled, this is actually a persuasive ruling the local bankruptcy court should consider. Of course, all cases have to be decided by the Court on a case by case basis.