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Lien Strip and Chapter 7 cases

The 11th Circuit Court of Appeals ruled in May 2012 that debtors can strip off a lien, such as a second mortgage, in a chapter 7 bankruptcy cases. In Re Lorraine McNeal, Court of Appeals Docket #: 11-11352. The 11th Circuit governs bankruptcy cases filed in the Middle District of Florida. Most circuits have ruled that a debtor cannot strip a second mortgage in a chapter 7 case and a debtor had to file a chapter 13 case to do so.  The court based its opinion on a case from 1989,  Matter of Folendore.

The losing party, GMAC Mortgage, LLC, filed a request for rehearing of the court's decision. If the motion for rehearing is denied, the losing party may petition for writ of certiorari, which is asking the United States Supreme Court to hear the case. The Supreme Court's exercise of jurisdiction is discretionary. The time to file the petition for writ is 90 days after the date of the denial of the rehearing, or if rehearing granted the subsequent entry of judgment. The 11th Circuit's decision may not be known until February 2013.

The general rule has long been recognized that while appeal stays execution of a judgment, it does not, until and unless reversed, detract from the decisiveness and finality of the order. In other words, until the case is reversed or the 11th Circuit changes their decision after rehearing, orders stripping junior mortgages in chapter 7 cases are valid.

Many chapter 7 debtors are seeking to reopen closed cases in order to bring motions to strip mortgages while the law still allows them to do so. While there may be a window of opportunity, there still is some risk that the law may be reversed or appealed in the future. If you have any questions or seek to reopen your case to strip a junior mortgage, please contact the offices of Timothy J. Sierra.

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