Lien Strip-Offs Abolished in Florida Ch. 7 Bankruptcies

Lien Strip-Offs Abolished in Florida Ch. 7 Bankruptcies

Florida has struggled with the devastating effects of the 2008 financial crisis. As businesses lost revenue and consumers were hit with unemployment, pay cuts, and furloughs, property values plummeted throughout the state. Between 2007 and 2013, Florida cities quickly had the highest percentage of underwater homes, or homes in which property value is less than the mortgage debt, of any U.S. metropolitan area. Foreclosures peaked during 2008-2009 during the Wall Street financial crisis, when nearly 403,500 homeowners and their families faced losing their homes.

One of the best strategies to use during this challenging time was petitioning for bankruptcy relief under Chapters 7, 11, or 13. Since filing for bankruptcy provides automatic stay protection, borrowers could obtain extra time to wait for the value of their property to increase or to secure extra income from their property. Under Chapters 11 and 13, a homeowner could propose a repayment plan modifying the amount of debt they owe based on a secured lien of their property. Reducing a lien to the value of the underlying collateral is called a “strip-down,” while reducing the value of a lien to zero when the underlying collateral has no value is called a “strip-off.” Many Florida debtors were able to find relief through these measures.

However, as of 2015, a Supreme Court decision has now abolished lien strip-offs in Chapter 7 bankruptcies in Florida (Bank of America v. Caulkett). This decision will have a widespread impact. Not only are the mechanics of the Bankruptcy code directly affected, but the decision alters the balance between a fresh start and lien survival in bankruptcy. It will also have long-lasting consequences on the Florida housing market.

With this change, debtors’ attorneys must determine whether to direct their clients toward a Chapter 13 plan now that lien-stripping under Chapter 7 is no longer an option. Debtors must accept that under Chapter 7 (in which underwater second mortgages cannot be voided), personal debts will be discharged, but liens will remain on all secured debts until they are either foreclosed or paid in full. This means that they will be faced with either continuing to make payments on an underwater mortgage or accepting foreclosure in Chapter 7 cases. Bankruptcy attorneys must be mindful on how this case impacts Florida’s volatile real estate market in order to know how to best serve their clients’ interests and develop an effective legal strategy.

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