Junior lenders can breathe a sigh of relief in the Bankruptcy Courts of the Southern District of Florida. The three judges of the Miami division have issued a memorandum opinion on the inability of chapter 13 debtors to “strip” liens when they are ineligible for a discharge. See In re Gerardin, 447 B.R. 342 (Bankr. S.D. Fla. 2011).
In bankruptcy, a debtor may seek to value a creditor’s collateral for the purpose of reducing that creditor’s secured claim to the value of its collateral. When a lien is completely removed because the creditor’s claim is not secured at all, this is known as a “strip off”. When the secured claim is partially reduced, this is known as a “strip down.” Over the last few years, as real estate values plummeted, the practice of valuing a creditor’s collateral for the purpose of “stripping” skyrocketed. This memorandum opinion clarifies the legal issue of stripping off the lien of a wholly unsecured mortgage in a chapter 13 plan filed after the same debtor receives a chapter 7 discharge – known as a “Chapter 20”. The decision obviously benefits holders of second or third mortgages in similar cases in the Southern District of Florida. Other jurisdictions, including the Southern and Northern Districts of California, have not resolved this issue of survival of liens and in rem obligations to the junior mortgage holder’s benefit.
Author(s): Aleida Martínez Molina
