“Stripping” a Mortgage From Your House – Chapter 7

One of the most important benefits of filing under Chapter 13 is the possibility of, “stripping,” or removing a mortgage from your residential property.  As a crash course in bankruptcy law, all of the following must be true if you want to, “strip,” a mortgage: (1) you must live in your house; (2) the value of your house must be worth less than the balance on the first mortgage; and (3) everyone who is responsible for the second/ third mortgage must be filing for bankruptcy relief.

Up until May 11, 2012, the only way to, “strip,” a mortgage in bankruptcy was to file under Chapter 13.

The game changed on May 11, 2012 when the 11th Circuit decided In re McNeal (11th Cir., May 11, 2012), as an unpublished decision.

In McNeal, the Court said that a Chapter 7 filer may, “strip off,” a lien if the value of the real estate is less than the balance on the first mortgage, i.e., “wholly unsecured.”  WOW!! This was great news for struggling home owners in Georgia!  I guess, a little too good to be true…

The good news got murky on June 1, 2012 when the mortgage company who lost in the May 11, 2012 ruling, GMAC Mortgage, LLC, appealed the decision by filing a motion for rehearing en banc.  So, what does this mean to YOU!?

As of today, if a lien strip was filed in a Chapter 7 case in the 11th Circuit, a Judge will not rule on whether the second/ third mortgage is discharged until the motion for rehearing en banc has been decided.  The time frame for the appeal to be resolved could be months or years.  So, we are in a holding pattern right now.

What is key for you to remember is if you filed under Chapter 7 and then filed a lien strip, you will not receive  a discharge of your debts until the appeal has been resolved.  If the appeal confirms the Court’s May 11, 2012 decision, then your stalled bankruptcy case will become active again and you should move toward a discharge of your debts, including the second/ third mortgage debt.

However, if the appeal overturns the Court’s decision on May 11, 2012, then your stalled bankruptcy case will become active again, but you won’t be relieved of your second/ third mortgage obligations, AND you now owe all of the mortgage payments you missed while your Chapter 7 bankruptcy case was sitting in quicksand waiting for the In re McNeal appeal to be decided.

The key with this issue is to be patient, and let the wheels of justice turn until the In re McNeal decision is clarified.

As of September 7, 2012, there have not been any updates on this issue.

Van Wieren Law Firm, LLC – Atlanta, Georgia, (404) 963-7408

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