According to Realty Trac, the State of Georgia has the distinction of being the nation’s number one state for foreclosures of real property.
During the month of May, 2012, 1 in 300 Georgia housing units was subject to repossession/foreclosure or notice that the property will be foreclosed. It has been 6 years since Georgia has had that distinction.
Among those properties facing foreclosure, a good portion will probably have more than one mortgage lien attached. Those second mortgage liens, also known as junior liens, can be actual mortgages or home equity lines of credit. Many of the debtors facing foreclosure have been turning to the Bankruptcy Court in an effort to try to save their properties.
Prior to May 11, 2012, when the 11th Circuit Court of Appeals handed down a controversial decision regarding the stripping of junior liens, it was believed that debtors who did file for bankruptcy protection could only find partial relief from the overburdening seconds through a Chapter 13 case. That all changed when the 11th Circuit handed down their decision in the McNeal v. GMAC Mortgage case.
Prior to the real estate market meltdown of 2008 and beyond, debtors and their attorneys could not take advantage of the bankruptcy laws allowing the stripping of junior liens from their property if they filed a Chapter 7 case. There was 2 basic reasons for this, first, the value of the property exceeded the first mortgage balance and second, many courts interpreted a narrow Supreme Court decision too broadly. Regarding home values, if a debtor had even one dollar of home value exceeding the first mortgage, the second was considered wholly secured. However, since 2008 things have changed as property values have declined to levels where even the first is no longer fully secured.
Debtors could take advantage of a provision in the bankruptcy laws that allowed the stripping of second liens when property values were below the first, but only if they filed a Chapter 13 case. With the recent decision by the 11th Circuit, the opportunity to strip off wholly unsecured seconds is now a distinct possibility even in a Chapter 7 case.
In the McNeal v. GMAC Mortgage case, the 11th Circuit Court of Appeals held that the plain language of Section 506 of the Bankruptcy Code allows wholly unsecured junior liens to be voided. This decision is in contrast to many earlier opinions held by other federal Appeals Courts throughout the country. It is uncertain whether GMAC will appeal this decision to the United States Supreme Court, but until they do, debtors should consider stripping off those second mortgages or HELOCs and give themselves a better chance to avoid foreclosure and save their property.