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The Eleventh Circuit recently held that a debtor is allowed to “strip off” an unsecured junior mortgage in a “Chapter 20” bankruptcy case. While Chapter 20 bankruptcy is not a valid chapter in the Bankruptcy Code, the term refers to a debtor who files back-to-back Chapter 7 and Chapter 13 bankruptcy cases.

What is a junior mortgage?

A junior mortgage is stripped or considered to be unsecured when there is insufficient equity to cover the first mortgage. If no equity exists to secure the inferior liens, they can be treated as unsecured and dischargeable.

In the case before the Eleventh Circuit three-judge panel, the debtor, Tahisia L. Scantling, received a discharge in her Chapter 7 case then filed a Chapter 13 case a year later. Scantling claimed that the bank’s second and third liens on her home where wholly unsecured and should be voided under 11 U.S.C. §§ 506 and 1322(b). The bank argued that the ability to lien-strip was contingent on the debtor being able to receive a discharge and Scantling was not eligible for discharge in her Chapter 13 case.

U.S. District Judge Harvey E. Schlesinger wrote the Circuit court’s opinion and stated: “The BAPCPA [Bankruptcy Abuse Prevention and Consumer Protection Act of 2005] did not amend §§ 506 or 1322(b), so the analysis permitting strip-offs in Chapter 20 cases is no different than that in any other Chapter 13 case.” Thus, debtors in so-called Chapter 20 cases can void inferior liens through Chapter 13 despite being unable to obtain a discharge.

If you are fortunate enough to live in the Middle District of Florida, the issue raised in the Scantling case may not arise. With a well thought-out strategy before filing your Chapter 7, you can strip wholly unsecured liens under In re: Lynette Malone/Wilmington Trust, NA v. Lynette Dais Malone and McNeal v. GMAC Mortgage, LLC in your Chapter 7 case.

If you have wholly unsecured junior mortgages and you are delinquent on your first mortgage loan payments, it may be wise, if you qualify, to strip and discharge the inferior liens in a Chapter 7, then file a Chapter 13 in order to catch-up and modify you first mortgage loan. However, if you are current on your first mortgage loan payments, there is no reason to file the Chapter 13 case. You can simply strip the junior liens in your Chapter 7, which saves you time and money. Additionally, the Middle District of Florida has a highly successful mortgage modification program. To learn more about it, please read our blog titled “Florida’s Mortgage Modification Mediation Program.”

If you have questions regarding stripping wholly unsecured junior mortgage liens or filing for bankruptcy protection, contact us for a free consultation.

We are a debt relief agency. We help people file for bankruptcy under the bankruptcy code.

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