Is Lien Stripping Sexy?

For many years those of us who practice in the Orlando Division of the Middle District looked wistfully at jurisdictions where second and third mortgages could be easily stripped off in a Chapter 7 bankruptcy. The higher complexity and expense of a Chapter 13 sometimes made lien stripping unfeasible. “11 U.S.C § 506(d) sure seems to authorize lien stripping,” we argued.

“Oh no,” said the judges. “When Dewsnup v. Timm, 112 S. Ct. 773 (1992) determined a Chapter 7 debtor could not “strip down” a partially secured lien under section 506(d), it also precluded a Chapter 7 debtor from “stripping off” a wholly unsecured junior lien.” They are the judges.

However, a court of appeals has ruled that a Chapter 7 debtor can strip off an entirely wholly unsecured junior lien. This is great news! Clients with a first mortgage that is more than the value of the property, the “underwater” home, can now strip off that lien in a Chapter 7, without the expense of a Chapter 13 reorganization plan.

Interested? Call me 321.633.0400

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