Junior Mortgages in Bankruptcy

At Shenwick & Associates, we hear from many clients who have multiple mortgages on their property and want to stay in their home while reducing their debt burden. Chapter 13, which allows individual debtors to reorganize their debts and pay off secured creditors, is often a good choice for these clients. However, the treatment of unsecured junior mortgages has been a confusing one for both Debtors and Bankruptcy Courts alike.

In In re Pond, 252 F.3d 122 (2d Cir. 2001), the Second Circuit Court of Appeals held that a Debtor could void a wholly unsecured junior mortgage loan. The Debtors in In re Latimer, (Bk. No. 08-21242, Bank. W.D.N.Y., Ninfo, J., Oct. 27, 2008) wanted to bifurcate a second mortgage on their house into a secured claim and an unsecured claim, arguing that Pond didn’t address the plain language of 11 U.S.C. §§ 1322(c)(2) and 1325(a)(5)(B), which appears to specifically allow this type of bifurcation.

Relying on precedents from other Circuit Courts of Appeal, the Bankruptcy Court agreed and held that the Debtors could bifurcate the second mortgage on the real property into an allowed secured claim and an unsecured claim. Although the Second Circuit Court of Appeals (which has appellate jurisdiction over cases from New York) has not yet considered this issue, this case provides authority for debtors to bifurcate and strip down undersecured junior mortgages on their home in Chapter 13.

For more information about Chapter 13 bankruptcy and how to preserve the equity in your home in bankruptcy, please contact Jim Shenwick.