Supreme Court to Review Chapter 7 Lien Stripping

It is commonly accepted that in Chapter 13 Bankruptcy cases a Debtor can “Strip-Off” a wholly unsecured second mortgage from their real property. That is, if on the date of filing the bankruptcy petition the Debtor owes more on the first mortgage than the property is worth, the second mortgage could be removed from the property upon the completion of the Debtor’s Chapter 13 Plan. This is a routine practice in Chapter 13 Bankruptcy Courts throughout the country.

The Eleventh Circuit Court of Appeals controls the law in Bankruptcy Courts in Florida. The Eleventh Circuit stands alone in that it not only allows for lien-stripping in Chapter 13 cases, but also in Chapter 7 cases as well. Every other United States Circuit Court to tackle the issue has ruled that the Bankruptcy Code does not provide a lien stipping mechanism for Chapter 7 Debtors. As it stands now, however, Chapter 7 “lien stripping” is still allowed in Florida Bankruptcy Courts if the Debtor is underwater on the first mortgage.

The practice of lien-stripping in Chapter 7 bankruptcy may be coming to an end shortly. Recently, the Supreme Court of the United States has decided to review two 11th Circuit cases that have upheld lien-stripping in Chapter 7. If the Supreme Court overturns these two cases it will effectively eliminate all lien stripping in Chapter 7 bankruptcy. Lien-stripping, however, would still be allowed in Chapter 13. The Supreme Court is expected to reach a decision some time next Summer.

The two cases that are being heard by the Supreme Court are Bank of America, N.A. v. Toledo-Cardona, Docket No. 14-163 and Bank of America, N.A. v. Caulkett, Docket No. 13-1421.

Jonathan Bierfeld is an attorney with Martin Law Firm, P.L., whose practice focuses in Bankruptcy Law and Civil Litigation. He is admitted to practice law in the State of Florida and the Federal Court for the Middle District of Florida. He primarily practices in Lee County Florida in Cape Coral and Fort Myers, Florida.