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Second mortgage on home could be stripped off in Chapter 7 bankruptcy Atlanta, GA

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Second mortgage on home could be “stripped off” in Chapter 7 bankruptcy

In a Chapter 7 bankruptcy proceeding, it is possible for a debtor to be relieved of most of his or her debts, making a fresh financial start. One drawback, however, is that this relief may come at the price of a loss of some property.

Questions may arise around a debtor’s home, especially if the value of the home is exceeded by the mortgage on it. However, what if there are two mortgages, and the second mortgage greatly exceeds the home’s value? Could a debtor avoid liability for that second mortgage? A recent United States Court of Appeals decision discussed this situation.

A second mortgage . . . exceeding the home’s value

In the case of In re McNeal, the debtor filed a petition for Chapter 7 bankruptcy, noting that her home was subject to two mortgages. The first mortgage lien was for more than $176,000, and the second mortgage with another company was for more than $40,000. However, the home’s fair market value was just over $140,000.

As part of the bankruptcy proceeding, the debtor sought to “strip off”-that is, no longer be liable for-the second mortgage, under the applicable federal bankruptcy law. The debtor argued this stripping off was justified because even the first mortgage was greater than the home’s fair market value.

The Bankruptcy Court refused to strip off the second mortgage and the District Court agreed. These decisions were appealed by the debtor to the United States Court of Appeals.

Could the second mortgage be voided?

In reviewing the case, the Court of Appeals noted that the United States Supreme Court had decided in Dewsnup v. Timm that a Chapter 7 debtor could not strip down a mortgage that was partially secured by the home’s value. In other words, if the value of the house covered the value of the first mortgage and at least part of the value of the second mortgage, then the second mortgage loan could not be stripped off.

However, the Court of Appeals explained that the Dewsnup decision only disallowed a strip down of partially secured mortgage liens. It did not address the strip off of a wholly unsecured loan, as in this case. In fact, the Supreme Court had even noted in its earlier decision the ambiguities in the federal Bankruptcy Code and the difficulty of interpreting the applicable statute in a way that would apply to all possible situations in the future.

Looking at the facts in this case, the Court of Appeals held that an allowed claim that was not secured by any property-just as the second mortgage was unsecured here-could be avoided under a plain reading of the applicable statute. Thus, the second mortgage could be stripped off in this bankruptcy proceeding and the Court of Appeals reversed the decisions of the lower courts.

Determining the best solution

If you are struggling financially, a Chapter 7 bankruptcy proceeding may provide relief. Even if a Chapter 7 bankruptcy does not suit your situation, there are other bankruptcy options available. A knowledgeable and experienced bankruptcy attorney can review your specific circumstances and work with you to determine the best solution for your needs.

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Jack L.

They did an excellent job with my case. Jamie took the time to really listen and understand things. She delved into the details and was extremely knowledgeable and non judgmental. Very professional and they know what they are doing. Would definitely recommend!

All C.

Mr. Gingold was recommended by an attorney I had worked with previously. I met with Ira Gingold to discuss credit issues. He went over each specific issue thoroughly. He advised me of the potential outcomes. He did all this in one meeting for a very reasonable price. When we finished I was confident in moving forward with a resolution. He definitely wants to help people take the appropriate course of action for their circumstance.

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I thought the process of filing bankruptcy was going to be a difficult one. However, Gingold & Gingold treated me with respect and dignity from the moment I walked through their door. I had the pleasure of working with Jamie. She is very responsive, professional, and knowledgeable. She took the time and listened to my every concern and handled each and every one of them to my satisfaction. My experience with filing bankruptcy under Gingold & Gingold's representation exceeded my expectations in a major way. They gave me such a peace of mind. I am very pleased with my decision of going with Gingold & Gingold to represent me when I filed Chapter 13 bankruptcy.

Julie T.

Wow! I am finally out of debt and can say that I am debt free after completing my chapter 7 bankruptcy case with Gingold and Gingold. Mr dangled was very knowledgeable and direct with regard to my debt situation. there were no surprises and the case went as I was advised. The staff was also very helpful whenever I had a question. I will definitely recommend them in the future to my friends.

Sherard W.

I cannot say enough about this law firm. From the initial consultation to our discharge, the entire office kept me updated with every step of the entire process. I came to the Gingold after a bad experience with another law firm. Ira and Jamie immediately began treating me like family through this experience. In the end, they assisted with eliminating many debts including my 2nd mortgage. I cannot say enough about the experience and knowledge that Ira brought to the table from the office visits to the court time. Thank you very much for helping me through this tough time. Thank you.

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