Eleventh Circuit Court of Appeals Affirms Decision to Strip Unsecured Mortgages

Chapter 13 Petition Addressed Status of Second and Third Mortgages

Court roomFollowing an appeal from the United States Bankruptcy Court for the Middle District of Florida, Tampa Division—on behalf of Wells Fargo Bank, N.A.—the United States Court of Appeals for the Eleventh Circuit affirmed an earlier court decision that discharged or “stripped” the value of a second and third mortgage, held by Wells Fargo Bank N.A., on a debtor’s primary residence. The key to the June 18, 2014 decision was a determination that the loans had been unsecured.

In this case, debtor Tahisia L. Scantling had filed a voluntary petition for debt relief under Chapter 7 of the Bankruptcy Code in 2010. Less than a year later, she received a Chapter 7 discharge. In 2012, Ms. Scantling petitioned for additional relief under Chapter 13 of the Bankruptcy Code, seeking to determine the status of the second and third mortgages on her principal residence and to void those liens filed by the bank.

First, the Court determined that a “Chapter 20” case (allowing both Chapter 7 and Chapter 13 relief) was permitted under the Bankruptcy Code. Second, the court upheld stripping those mortgages because they had been unsecured (based on a valuation procedure that verified the creditor did not hold a secured claim. After that determination was made (based on a comparison of the loan value to the home value), the creditor’s rights were modified so it could no longer hold the lien, to which it would otherwise have been entitled, under non-bankruptcy law.

In conclusion, it is possible to strip off the value of a second (and/or third) mortgage, when the mortgage is not secured by other collateral, and financial circumstances meet the requirements of a Court-determined Chapter 13 payment plan.

A bankruptcy attorney can assist a homeowner in assessing circumstances that would affect whether a second or third mortgage on a primary residence could be discharged through Bankruptcy Court. Know your options. Know the law.

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