Eliminating Second Mortgages that are Underwater in Chapter 13

The National Association of Consumer Bankruptcy Attorneys brought to my attention this morning that the Fourth Circuit joined the majority of circuits in allowing the "strip off" of unsecured liens in Chapter 13.

Debtors scored a victory in the case of Suntrust v. Millard, No 09-2266 (December 15, 2010), when the Fourth Circuit affirmed the lower courts' grant of debtor's motion to avoid lien in chapter 13. In support of the pro se debtor's position, NACBA filed an amicus brief arguing that pursuant to the Supreme Court decision in Nobelman v. American Sav. Bank, 508 U.S. 324 (1993), as well as the plain language of the Code, and the weight of authority among the circuits, a wholly unsecured lien may be modified in a chapter 13 bankruptcy under §§ 506(a) and 1322(b)(2).

This concept means that second and third mortgages that are no longer secured (that is, the value of the house is less than the second and third mortgages) can simply be eliminated in a Chapter 13.  This makes Chapter 13 a very good tool for those who can make the first mortgage payment but would benefit from getting rid of the second (or third) mortgage payment.