In this post about lien stripping, we discussed the significant benefits of “stripping,” or removing, second or third liens from homes when the value of the home is less than the higher priority liens. The ability to strip these wholly unsecured liens has always been a powerful tool in Chapter 13 cases. However, lien stripping has traditionally been limited to Chapter 13 cases and not Chapter 7 cases.
This changed in June 2012 when the Eleventh Circuit Court of Appeals decided the case of McNeal v. GMAC Mortgage, LLC. In that case, the Court entered an order holding that wholly unsecured liens could be stripped in Chapter 7 cases. Importantly, the Eleventh Circuit only includes Georgia, Florida and Alabama so the order only applies to cases in those states. Since that order was entered, many, many people have taken advantage of the benefits of lien stripping in Chapter 7 cases and permanently removed liens from their homes. Chapter 7 has the additional benefit of permanently removing the liens without having to complete a three to five year Chapter 13 Plan. If you are in Georgia, Florida and Alabama, and believe you may be able to take advantage of lien stripping in a Chapter 7 or Chapter 13 case, it is important that you contact a good Bankruptcy lawyer in the near future to review your situation. One reason for urgency is that property values are increasing in many areas of the country, including the Metro Atlanta area. If your home is worth more than the balance on senior liens, even by $100, you will not be able to strip the lien. Finally, as discussed below, the availability of Chapter 7 lien stripping in these states may go away in the next year or so. If the law is changed before you get a final order in your case, you will not get the benefit. Contact a Bankruptcy lawyer in your area (or contact us in Georgia) to set up a meeting or a phone call. How could the availability of lien stripping in Chapter 7 cases go away? Without getting too deep into legal lingo (which is not the purpose of this Blog), because the McNeal case was only decided by a panel of three judges of the Circuit Court rather than the entire Court, it is actually not absolutely binding on Bankruptcy Courts in Georgia, Alabama and Florida. However, because it is persuasive authority, even judges in those states that disagree with the case have chosen to follow it and allow lien stripping in Chapter 7 cases. At some point in the future, the issue could be heard by the entire Eleventh Circuit Court and they could reach a different conclusion that would be binding on all Courts.
Second, because there is now a conflict among the Circuit Courts in the country because of the Eleventh Circuit’s McNeal opinion, the issue could be decided by the United States Supreme Court. One of the significant duties of the Supreme Court is to resolve conflicting cases in the Circuit Courts to ensure uniformity in federal law. In fact, the Supreme Court was recently asked to decide the issue. Because of the importance of lien stripping in Bankruptcy, I would expect there is a very good chance that the Supreme Court will address the issue (they did, and overruled Chapter lien stripping in June 2015).
Finally, if they choose to do so, Congress could amend Bankruptcy law so that there is no conflict among the Circuits. They could easily change the law so that lien stripping is available in Chapter 7 cases as it is in Chapter 13. Since the courts mentioned above are interpreting the Bankruptcy Code, there would be nothing for them to decide if the law is changed. As of the date of this post, it does not appear that will happen anytime soon.
If you are inclined to read a little further on the legal analysis, here are a couple articles from the Georgia Bankruptcy Blog:
- The Eleventh Circuit Court of Appeals Allows Lien Stripping in Chapter 7 Cases.
- Georgia Bankruptcy Judge Disagrees with McNeal Decision, But Follows It Anyway.