For Immediate Release

NEW YORK, NYThe U.S. Court of Appeals for the Eleventh Circuit recently ruled that chapter 7 bankruptcy debtors can strip off, or cancel, wholly unsecured mortgage liens. The per curiam opinion, issued May 11, 2012, marks a significant departure from the standard Chapter 7 practice in most districts.

In deciding McNeal v. GMAC Mortgage, LLC, et al. (In re McNeal), 11-11352, (11th Cir., 2012) the circuit court disregarded the seminal 1992 U.S. Supreme Court decision in Dewsnup v. Timm, in which the Supreme Court held that a chapter 7 debtor could not “strip down” a partially secured lien to the value of the collateral under section 506(d) of the Bankruptcy Code. Instead, the court relied on a 1989 11th Circuit opinion, Folendore v. U.S. Small Bus. Admin., 862 F. 2d 1537 (11th Cir. 1989), in which the court held that wholly unsecured junior liens are void under section 506. Because Dewsnup concerned a “strip down” and not a “strip off,” the court felt obligated to follow its pre-Dewsnup precedent, Folendore.    

“Stripping down” refers to removing that portion of a mortgage that is unsecured, which is done pursuant to Bankruptcy Code section 506. On the other hand, “stripping off” goes further. It essentially crams down a mortgage, which means removing its lien status altogether.

Post-Dewsnup courts have generally interpreted Dewsnup to prohibit chapter 7 debtors from avoiding (stripping off) liens which are wholly unsecured for the same reasons that a chapter 7 debtor may not reduce a secured mortgage claim to the fair market value of the property (stripping down). Such a reading or extension of Dewsnup is a proper and consistent application of Section 506, and not inconsistent with the Second Circuit’s decision in In re Pond, 252 F.3d 122 (2d Cir.2001). Weltman & Moskowitz represents clients in both the Second and Third Circuits, which include district courts throughout New York and New Jersey.

McNeal is contrary to prior holdings in the Fourth, Sixth and Ninth Circuits that have prohibited lien stripping in chapter 7 cases. Appeals of discussions denying lien stripping in chapter 7 are pending in New York, Utah and Illinois. It is likely this issue will reach the Supreme Court in a few years.  As a practical consequence of the opinion, second and third priority liens such as home equity loans, may no longer pass through a chapter 7 bankruptcy case unaffected if McNeal gains traction in other circuits.

Locally, in the Eastern District of New York – which covers Kings, Queens, Richmond, Nassau and Suffolk Counties -- there is a split of authority between bankruptcy judges sitting in Central Islip on this issue. Judge Trust (In re Caliguri, No. 09-75657-AST, slip op. (E.D.N.Y. March 16, 2010), and Judge Grossman (In re Pomilio, 2010 WL 681300 (Bankr. E.D.N.Y. 2010), have ruled that lien stripping in chapter 7 is impermissible. Judge Eisenberg has held otherwise in In re Lavalle, 2009 WL 4043089 (Bankr. E.D.N.Y. 2009).

Also, McNeal may have a significant impact on chapter 13 cases, particularly in so-called “chapter 20” situations. In chapter 20, a debtor first files under chapter 7 petition to discharge unsecured debt. After receiving a discharge in chapter 7, debtor later files a chapter 13 case to address an arrearage on a principal mortgage. Sections 506 and 1322 each provide that the lien stripping is immediate. This means debtor need not obtain a discharge in chapter 13 in order to void or lien strip a wholly unsecured mortgage. Of course, there is always the issue of good faith when seeking relief under chapter 20.  

In the past, secured lenders largely disregarded motions in chapter 7 cases. If McNeal is adopted by the Second and Third Circuits, secured creditors will now need to closely watch consumer cases and evaluate potential objections and defense strategies. Creditors will also need to pay attention to how a particular judge may have ruled on the issue.

Weltman & Moskowitz routinely represents the interests of mortgage lenders in bankruptcy courts and state courts. Please contact a member of our team to understand how to respond to this latest development.  

Richard E. Weltman and Michael L. Moskowitz are members of Weltman & Moskowitz, LLP, a full-service business law firm serving clients in New York, New Jersey and Long Island.  The firm focuses on bankruptcy and creditor’s rights, insolvency and business litigation, business divorce, commercial dispute resolution, and business transactional matters, including entity formation, counseling and buy-sell agreements. They can be reached at 212.684.7800 or 201.794.7500 or by e-mail at or