On May 11, 2012, the Eleventh Circuit Court of Appeals issued an unpublished opinion, McNeal v. GMAC Mortgage LLC, et al., Case No. 11-11352 (11th Cir. 2012), which allowed a Chapter 7 debtor to strip off a wholly unsecured mortgage where the amount of the first mortgage exceeded the value of the home.  Prior to McNeal, it was commonly understood that wholly unsecured mortgages could not be stripped off in a Chapter 7, although they could be stripped off in a Chapter 13.  This understanding was based on Dewsnup v. Timm, 112 S. Ct. 773 (1992), which held that a Chapter 7 debtor could not strip down a partially secured mortgage in a Chapter 7 bankruptcy.

In McNeal, the debtor sought to strip off her wholly unsecured mortgage in a Chapter 7.  It was undisputed that the second mortgage was both an allowed claim pursuant to 11 U.S.C. Section 502 and a wholly unsecured claim pursuant to 11 U.S.C. 506(a).  The Bankruptcy Court denied the debtor’s request and the District Court affirmed the Bankruptcy Court’s ruling.  On appeal to the Eleventh Circuit, the Court overruled the District Court.

In its analysis, the Eleventh Circuit acknowledged that many courts interpreted Dewsnup to also preclude a Chapter 7 debtor from stripping off a wholly unsecured second mortgage.  Despite lower courts’ reliance on Dewsnup, the Eleventh Circuit found that the controlling precedent was actually Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989).  In Folendore, the court held that an allowed claim that was wholly unsecured was voidable under the plain language of 11 U.S.C. Section 506(d).  In McNeal, the Eleventh Circuit disagreed with the bankruptcy courts that treat Folendore as abrogated by DewsnupMcNeal is currently up on appeal and we should have a binding decision soon as to whether Chapter 7 debtors can strip their wholly unsecured mortgages.  In the meantime, some courts are following McNeal as persuasive authority and/or allowing unsecured mortgages to be stripped off in a Chapter 7 if uncontested.

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.