Stripping off junior liens or second mortgages in Chapter 7

The 11th Circuit Court of Appeals has pushed the limits again.  It has been well documented that the “stripping down” of liens is not allowed under Chapter 7 bankruptcy.  For years, especially since the mortgage crisis of 2007, Chapter 7 debtors have asked their attorneys if they can strip their second mortgage in Chapter 7.  However, due to the Supreme Court’s decision in a case titled Dewsnub v Timm, most jurisdictions followed the rule that junior liens cannot be stripped in Chapter 7 bankruptcy cases.

11th Circuit Court of Appeals Allows Stripping Second Mortgages in Chapter 7

In 2012 the 11th Circuit reaffirmed their earlier decisions stating that there was a distinction between wholly “stripping off” a junior lien on a home when the first mortgages were under water and “stripping down” a lien whose first mortgage is not completely under water.   The 11th Circuit proceeded to allow debtors the ability to strip off junior liens if the first mortgage was under water.

Now the 11th Circuit has upheld another case with that distinction.  Bank of America, the junior lien holder in the present case has appealed to the Supreme Court and the Court has granted the petition for a writ of certiorari.  In other words, the Supreme Court has agreed to hear the case.

The Supreme Court Question

There are many eyes, from the mortgage industry, bankruptcy attorneys, debtors and corporations on this case because the obvious ramifications.  The issue at hand is:  Does Section 506(d) of the Bankruptcy Code allow a debtor filing for bankruptcy to void a second mortgage when the debt owed on the first mortgage exceeds the value of the collateral property?  As it stands in here in California, the 9th Circuit holds that stripping off junior liens is not allowed.   For more information, contact your bankruptcy attorney.