Today the 4th Circuit Court of Appeals entered a very brief opinion that is great news for bankruptcy debtors, holding that junior liens — second mortgages, home equity loans, etc. — can be “stripped off” of a Debtor’s principal residence in a Chapter 13 case when they are wholly unsecured by any equity in the property. While most of the Courts of Appeals (all that have decided the issue) have already said that this is allowed, some lower courts have said it cannot be done, prompting Suntrust Bank to challenge a Debtor’s right to do this in a case arising in Maryland. The Bankruptcy Court allowed it, and it was affirmed by the District Court, but Suntrust appealed to the 4th Circuit Court of Appeals. Today’s ruling inSuntrust v. Millard, No. 09-2266, simply states:
SunTrust appeals the district court’s order affirming the bankruptcy court’s order granting the Debtors’ Motion to Avoid Lien. We have reviewed the record and find no reversible error. Accordingly, we affirm for the reasons stated by the district court. SunTrust Bank v. Millard, No. 8:08-cv-03002-MJG, 08-17964 (D. Md. Nov. 7, 2008 & Sept. 28, 2009).
This should come as a great relief to debtors in the 4th Circuit (Maryland, Virginia, West Virginia, and North and South Carolina) with homes with underwater mortgages. It is now clear that the ability to strip off junior mortgages in Chapter 13 is secure in cases where the value of the property is less than the amount of the first mortgage. The second mortgage is simply treated as unsecured debt in the Chapter 13 case, and upon completion of the plan it is removed from the title. In many cases, the ability to do this allows families to save their homes that would otherwise be unaffordable.
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