Recently, in an article published in the American Bankruptcy Institute, we dissected the recent 11th Circuit Court of Appeals decision in the case of In re McNeal. The decision was short, only two pages in fact, but in it the court drastically changed the rights of upside-down debtors with junior mortgages who have filed for Chapter 7 bankruptcy.
Although lien avoidance or modification is not a novel concept under Chapters 11 and 13 proceedings, for almost two decades courts have nearly unanimously held that the Bankruptcy Code does not allow for the avoidance of liens in a Chapter 7 liquidation. Nevertheless, in McNeal the court held that when a homeowner has a first mortgage on his home that is greater than the value of the home itself, any junior mortgage is wholly unsecured and may be “stripped off” or completely avoided.
What does this mean for creditors who have issued junior mortgages? Potentially a great deal. Debtor’s attorneys are becoming more and more aware of McNeal, as are the courts. As an example, on June 28, 2012, the Bankruptcy Court for the Middle District of Florida issued a revised “Negative Notice” list for permissive motions to be filed in Chapter 7 proceedings to include a “Motion to Determine Secured Status/Strip Lien on Real Property.” Since then, an increasing number of motions are being filed throughout the Circuit, some of which have been granted because of a creditor’s failure to act within the required thirty days.
The creditor in McNeal has asked the court to reconsider its decision, and as of today, this motion is still pending. In the meantime, creditors stand to lose thousands, if not millions, on wholly unsecured junior mortgages. The law and procedures surrounding lien avoidance in Chapter 7 proceedings are complex. So far the motions filed to strip liens demonstrate an unsophisticated understanding of the case and the required procedures. As debtors’ counsel become more experience pleading under McNeal, the case’s teeth may truly begin to sink in.
To read more about McNeal, click here.