Bankruptcy Questions Answered

Court Permits Chapter 13 Debtor To Strip Part of Second Mortgage Securing Three Loans

I received a copy of an interesting bankruptcy court order from Jordan Bublick, a Miami bankruptcy attorney. Mr. Bublick’s debtor filed a Chapter 13 bankruptcy. The debtor had three separate loans with a large bank. Each loan was for a different amount and terms. All three loans were secured by a single junior mortgage on the debtor’s principal residence. The creditor filed three separate claims, one for each loan.

Bankruptcy law allows Chapter 13 debtors to "strip" any mortgage on a primary residence that is wholly unsecured. In this instance, there was enough equity after considering the purchase money first mortgage to cover the amount of one of the bank’s three loans. Mr. Bublick filed a motion to strip the junior mortgage and modify the claims. The bank responded that because all three loans were secured by one mortgage, and at least part of the total loan amount was secured by that mortgage, the debtor could not modify the claims nor strip the mortgage lien from the personal residence.

The bankruptcy court held that even though the bank secured the debts with a single mortgage the loans and the banks claims were separate obligations. The court found that there was sufficient home equity to secure one of the three bank loans. The court stated the debtor could avoid the mortgage to the extent of two claims which exceeded the home value. Pursuant to to the Bankruptcy Code’s definition of "claim" as a right to payment, the bank holds three separate obligations in form and substance under Florida law notwithstanding the single mortgage security. The case is 09-12578-BKC-LMI