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Will Supreme Court Provide Wayne County Homeowners Mortgage Relief?

The U.S. Supreme Court has recently agreed to hear two Florida chapter 7 bankruptcy cases where the 11th U.S. Circuit Court of Appeals has ruled that a bankrupt homeowner with two mortgages on their home may "strip off" or "strip away" the second mortgage. The "strip off", according to the 11th Circuit, can occur where the first mortgage balance on the home exceeds the value of the home. There would be no remaining value left in the home to support the lien of the second mortgage. A "strip off' of a mortgage should be distinguished from a "strip down" or "cram down" of a mortgage. What the latter two words mean is that the mortgage's principal balance is reduced to the current market value of the property which only partially supports the second mortgage. The Supreme Court has ruled in the past that a "strip down" or "cram down" cannot occur in a chapter 7 bankruptcy. It has not yet ruled in a chapter 7 bankruptcy that a second mortgage can be "stripped off" where it is wholly unsecured.

 

The consequence of the "strip off' would mean that the Wayne County bankrupt homeowner would not only not personally owe the balance of the second mortgage but that the home could be sold in the future without the lien of the second mortgage having to be paid. It would legally not exist. A favorable decision by the U.S. Supreme Court supporting the chapter 7 bankruptcy debtor's legal right to "strip off" a second (or third, etc.) mortgage could bring substantial relief to homeowners nationwide as that would become the supreme law of the land.

Currently, there is no decision by a bankruptcy judge in Michigan that supports the legal right to "strip away" a wholly unsecured residential mortgage in a chapter 7 case. This writer does not believe that a Michigan bankruptcy judge would agree with the 11th Circuit. However, if the Supreme Court recognizes such a right, Michigan bankruptcy judges would have no other choice but to also recognize the legal right to do so. Michigan is part of the 6th U.S. Circuit Court of Appeals where the right to "strip away" a second or third, etc. mortgage has existed in a chapter 13 bankruptcy since 2002. To obtain the "strip away" in a chapter 13 case the Wayne County homeowner would have to engage in a payment plan to partially pay back something to all creditors for three to five years. Most chapter 13 cases do not have to pay all the debt that is owed. Many Wayne County homeowners may not be able to engage in such a repayment plan. "Stripping away" the second mortgage in a chapter 7 case, which typically ends in the four months, would bring much needed alternative relief to homeowners.

The U.S. Supreme Court, however, does not permit a "strip down" or "cram down" of a partially secured residential mortgage in a chapter 13 case. It is recognized that a "strip down" or "cram down" can occur in chapter 13 cases which only involves a non-residential mortgage such as rental or business properties.

There is a danger that if the Supreme Court fails to recognize the legal right of a chapter 7 bankrupt Wayne County homeowner to "strip away" a wholly unsecured second mortgage that the reasoning behind its decision may lead Michigan bankruptcy judges to conclude that the right to "strip away" the mortgage does not also exist in a chapter 13 case. In other words the judges would be free to reexamine the issue and disregard the precedent of the 6th Circuit. This would not bode well for Wayne County homeowners living under the burden of homes for which they owe more than they are worth.

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