Lien Strip in Chapter 13 after Chapter 7 Now Permitted in South Florida: Scantling Decision 11th Circuit

Debtors may now strip off a second mortgage in a chapter 13 even after filing a chapter 7 in Fort Lauderdale chapter 13 cases and other South Florida chapter 13 bankruptcies.   This has been an issue across the country.  In South Florida, the local bankruptcy judges have ruled that a debtor could not eliminate junior mortgage liens after obtaining a chapter 7 discharge.  However, the 11th Circuit Court of Appeals today ruled today in the Scantling case that debtors can eliminate junior liens even in the so-called chapter 20, filing a chapter 13 after a chapter 7.

This means that debtors who filed chapter 7 and are not eligible now to file bankruptcy again to obtain a discharge nevertheless can file a chapter 13 to eliminate second mortgages.

I would like to thank Patrick Scott for sending me the following analysis:

“Jeff Kuntz of my office shared with me today’s new Eleventh Circuit opinion adopting Judge Williamson’s reasoning in Scantling and rejecting the separate and joint opinions of the Southern District Miami Division bankruptcy judges Mark, Isicoff, and Cristol and the published opinion of Judge Jennemann. 

In a decision by Judge Tjoflat and two senior district judges (an “emergency” practice adopted by the chief judge while the court was short-staffed three judges), the appeals court holds that it is permissible for a debtor to obtain lien-stripping through “chapter 20,” which happens when the debtor whose debts exceeded the chapter 13 eligibility threshhold first discharges unsecured debts in chapter 7 and then files a chapter 13 to get the benefit of Section 1322(b)(2)’s right to modify secured debts.  The question persisted after the BAPCPA amendments in 2005 whether such debtors could strip off the “wholly unsecured second mortgages,” as the Nobelman and Tanner decisions permitted them to do in straight chapter 13 cases, despite the fact that Congress in adopting the 2005 Code amendments forbade the discharge of any debt in a chapter 13 case where a discharge had been granted in a chapter 7 case that had been filed less than four years earlier—an amendment apparently directed at chapter 20 cases.

The appeals court held that wholly under-water second and third mortgagees are not secured creditors entitled to the protection of the Chapter 13 antimodification clause, section 1325(a)(5), in a “chapter 20” case any more than they would have been in a straight chapter 13 case.  The Miami judges had held that section 1325(a)(5) protected wholly under-water mortgages as “allowed secured claims” in a chapter 20 regardless of what would be considered “secured” under section 506(a).

The decision, which is directed to be published, is Scantling v. Wells Fargo Bank (In re Scantling), No. 13-10558 (11th Cir. June 18, 2014). “


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