I didn’t say the things I said.
Quote attributed to baseball great Yogi Berra
One of the main benefits of bankruptcy is the ability of the debtor to restructure his finances, and, in some cases, modify debts by reducing principle or changing terms, like the interest rate or length of the contract. The opportunity to modify an underwater home mortgage is obviously an enormous benefit for someone struggling to pay bills and keep his family home. Unfortunately, Congress made it clear that Chapter 13 debtors may not modify a primary home mortgage (see 11 U.S.C. § 1322(b)(2)), and the U.S. Supreme Court decided that modifying an upside-down home mortgage is not available for Chapter 7 debtors. See Dewsnup v. Timm, 502 U.S. 410 (1992).
But bankruptcy courts around the country have allowed Chapter 13 debtors to “lien strip” junior home mortgages, but only when the junior mortgage is entirely unsecured. For example:
Home value: $300,000.00
First Mortgage: $300,001.00
Home Equity: -$1.00
Since there is no remaining equity in the home after paying the first mortgage, any junior mortgage is unsecured. Most courts agree that any junior lien in our example home may be stripped away, and the remaining unsecured debt either paid in full, partially paid, or entirely discharged at the end of a Chapter 13 case.
Unlike in Chapter 13 cases, this lien stripping opportunity has not been extended to Chapter 7 debtors. For years bankruptcy courts have applied Dewsnup and held that a Chapter 7 debtor may not strip off a wholly unsecured junior lien. See Palomar v. First American Bank (In re Palomar), No. 12-3492 (7th Cir. July 11, 2013); Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Wachovia Mortg. v. Smoot, 478 B.R. 555 (E.D.N.Y. 2012). Things changed for some Chapter 7 debtors in 2012 when a unanimous panel of the Eleventh Circuit Court of Appeals found Dewsnup to be irrelevant when applied to a junior mortgage that is entirely unsecured. In re McNeal, Appeal No. 11-11352, 2012 WL 1649853 (11th Cir. May 11, 2012).
Since there is a split in the Circuit Courts, and the matter is of tremendous importance to many debtors, it would seem that the issue of lien stripping an unsecured junior home mortgage in Chapter 7 would be ripe for restatement by the Supreme Court. Sadly, the High Court recently denied certiorari in such a case and refused to hear the issue. The case of Bank of America v. Sinkfield, No. 13-700, asked whether a wholly unsecured lien may be stripped off in a Chapter 7 case. In that case the Eleventh Circuit courts allowed the debtor to strip off the lien, so by refusing to hear the case, the debtor, Sinkfield, scored a decisive victory. However, this issue remains hotly contested in many areas, and the Court’s refusal to hear the matter has left many debtors in limbo wondering how to interpret the Supreme Court’s silence.