As a general premise, in bankruptcy, a secured creditor is only secured to the extent that their security or collateral has value equal to or greater than the ‘secured’ debt. For many years that very basic bankruptcy premise applied to anything and everything except your primary residence, your homestead.
In May of 2012, in the case of In Re McNeal the 11th Circuit ruled that in a chapter 7 case, a Debtor – Homeowner could value their homestead property and in turn, if the second mortgage lien were fully and totally unsecured (the value of the property is less than the amount of the debt) the second mortgage lien is removed (‘stripped’) from the property and the entire debt or financial obligation discharged.
Up until the McNeal decision, junior mortgage liens could only be stripped in Chapter 13 cases which meant some portion of the second mortgage would be repaid as a general unsecured debt under the Chapter 13 Plan.
This is an incredible benefit to a consumer debtor whose home has declined in value as a result of the Recession or for any other reason. It gives new and significant meaning to the term ‘Fresh Start’ and allows the Debtor(s) to retain their homestead and discharge debt which would certainly strain the budget of a newly discharged Debtor.
The real practical significance for the Debtor – Homeowner is that once they strip the junior lien off the property, it becomes significantly easier to seek and obtain a mortgage loan modification because the income which would be dedicated to paying the second mortgage is now free to make it easier to pay a modified first mortgage.
If you are considering the filing of a Chapter 7 or even a Chapter 13 bankruptcy, you certainly want to make certain that your counsel and you discuss this possibility and investigate homestead property values as it pertains to this issue.
The McIntyre Firm has extensive experience with lien stripping junior mortgage debt as well as all the other nuances and subtleties of filing a consumer bankruptcy in this economic environment. Our Mortgage Modification Department has had tremendous success in modifying payment terms, reducing principal balances and helping homeowners retain their single most valuable asset, their Home.
