In Georgia, You can File Chapter 7 to Wipe out Your Second Mortgage Liability

If your Atlanta, Georgia house is underwater, you may be able to file Chapter 7 to wipe out your second mortgage. A recent Eleventh Circuit Court of Appeals case before a three judge panel known as McNeal vs. GMAC Mortgage LLC, Case No. 11-11352 (11th Cir. 2012)(unpublished), provided consumer bankruptcy debtors in Chapter 7 the ability to petition the court to “strip” or cancel 2nd mortgage liens on properties that are so undervalue that the sale of the property would not generate sufficient profit to pay anything to the second mortgage company.

The Court of Appeals decision reversed the Northern District of Georgia Bankruptcy Court, Atlanta Division, decision and the district court decision. Both the bankruptcy court and the district court ruled that debtors in Chapter 7 bankruptcy cannot “strip” or cancel second mortgage liens under the bankruptcy laws as written. Prior to the Court of Appeals’ decision, Georgia bankruptcy filers could only get rid of their second mortgages in Chapter 13 cases.

Just this week, the Law Offices of Charles Clapp obtained our first ruling in Atlanta post-McNeal on a Chapter 7 bankruptcy second lien strip motion. Judge Massey granted the Chapter 7 debtors’ motion to wipe out the second mortgage lien on their Atlanta house, which is worth much less than they owe on it. After proper service and notice on the second mortgage lender, the bank did not respond or oppose the motion in any way. Judge Massey in Atlanta allowed the stripping of the second mortgage and will issue an order on the matter.

I imagine that the order shall instruct the second mortgage lender to cancel its existing lien on the house. Our firm will file the judge’s order in the superior court clerk’s office in Cobb County where the home is located and contact the bank for a cancellation.

This is a great victory for consumer bankruptcy filers in the Atlanta, Georgia area. What this means for these Atlanta debtors is that they will not have to pay the monthly mortgage on the second loan, and that the second mortgage company will not have to be paid if the debtors ever sell or transfer their house to a third party. Unlike the typical Chapter 7 case that does not normally cancel liens, this one will discharge the debtors’ personal liabilities or obligation to pay AND cancel the secured interest in the property. Saving the monthly second mortgage payment allows the debtors to pay the first mortgage or even save the money.

Our office has a second similar motion pending in the Newnan Division of the bankruptcy court this week and will report back as to the Court’s decision on the matter.

If you own a house that is underwater but want to look at options for keeping your Atlanta area home in bankruptcy, you may want to evaluate if you can wipe out the 2nd mortgage lien. For a free consultation on using the new lienstripping ruling to keep your Atlanta home in bankruptcy, please call the Law Offices of Charles Clapp at 404.585.0040.