Philadelphia Bankruptcy Lawyer Blog

Periodically, it is a good idea to push the boundaries. This not only establishes where those boundaries are but also signifies a desire (by some, at least) to expand them. Such was the case in McNeal v. GMAC, a case out of Atlanta, Georgia. Heard before the United States District Court, Northern District of Georgia was case number 1:10-cv-1612-TCB. Ms. Lorraine McNeal argued that her wholly unsecured second mortgage should be subject to a lien strip in a Chapter 7 bankruptcy case. The result was unsurprising: a lien strip is not appropriate in a Chapter 7 bankruptcy case. This upholds the status quo of a case called Dewsnup, which specifically denied a lienstrip under the auspices of 11 USC §506 strip-off. Nonetheless, it is good to ask the question. When one domino falls - that is, when one judge grants the relief - the door becomes slightly cracked, allowing other judges to rely on it, thereby opening the door ever so gradually. Ultimately, a case which fundamentally changes the established framework of lienstrips will find its way up the ladder to, presumably, the United States Supreme Court, but it takes a case to get a case heard before the court.

I can only assume that the lawyer who filed this case for Ms. McNeal understood the law and was, indeed, seeking to challenge the precedent of Dewsnup and the legacy of section 506 (and 1322). Nonetheless, the need for competent legal counsel is apparent when reading a ruling which so resoundingly denied the requested relief as though the debtor, Ms. McNeal, was silly to have even asked. Again, though, this case was likely a knock at the door with a hope of finding a crack.

This leaves, then, the status quo: a lienstrip is available in Chapter 13 bankruptcy only. Recall that a lienstrip allows a debtor to treat their second mortgage (or any junior lien) as unsecured debt - like a credit card debt - and get it discharged in their Chapter 13 bankruptcy, the same as the discharge granted in Chapter 7 bankruptcies. The only caveat is that the junior debt must be wholly unsecured. That is, the value (balance owed) of the senior loans must exceed the value of the home itself. Where a boat or other secured debt is concerned, there may be a way to do a "cram down" but that is for another posting (that would essentially be the court forcing the lender to accept the current market value for the property as opposed to the contract amount). Say, then, that the home is worth $300,000 but $350,000 is owed on the "first mortgage" and $50,000 is owed on a home equity line or "second." This $50,000 could be totally extinguished (like medical bills, for instance) if the debtor successfully completes their payment plan. Most Chapter 13 payment plans are between three to five years in length.

Continue reading "Chapter 7 Bankruptcy Lien Strip Denied (Applicable to Philadelphia and Surrounding Areas) - McNeal v. GMAC" »

Change is often a good thing. Not changing can also be a good thing when that which is at issue is already a benefit to debtors. Such is the case in the ruling of the Court of Appeals for the Fourth Circuit in Suntrust Bank v. Millard where the court, in a brief and succinct statement, said, in essence, they refuse to find fault with the current status quo as it relates to lien stripping. A link to the statement is here, though the relevant portion is below:

"SunTrust appeals the district court's order affirming the bankruptcy court's order granting the Debtors' Motion to Avoid Lien. We have reviewed the record and find no reversible error. Accordingly, we affirm for the reasons stated by the district court. SunTrust Bank v. Millard, No. 8:08-cv-03002-MJG, 08-17964 (D. Md. Nov. 7, 2008 & Sept. 28, 2009). We dispense with oral argument because the facts and legal contentions are adequately presented in the materials before the court and argument would not aid the decisional process."

What this means, of course, is that the landmark ruling of In Re Nobleman should not be disturbed. Of course, the courts can at any time revisit this issue. The Suntrust ruling is from December 2010 so the tides do not yet seem to be shifting to a new paradigm -- and this is a good thing -- but it would simply be a matter of judicial choice or legislative enactment to overturn the status quo in lien stripping.

Lien stripping is the process by which a junior loan on an upside down property (where the value of the home is less than that which is owed on the first or senior loans) is declared unsecured in a Chapter 13 bankruptcy and can be, upon successful completion of the repayment plan, wholly discharged just like it was a credit card debt or other personal loan. If you are a struggling homeowner, contact a bankruptcy attorney and see if you might qualify for a lien strip.