In Chapter 13 bankruptcy cases, debtors and unsecured creditors have the ability to strip-off wholly unsecured liens pursuant to 11 U.S.C. 506(d). By example, in the recent case of In re Smith, Case No. 6:12-02333-ABB in the Bankruptcy Court in and for the Middle District of Florida, the Court granted the debtor’s motion to strip-off a creditor’s second mortgage of approximately $400,000.00 where two parcels of real property were valued at $111,000.00 and a first mortgage of $215,000.00 encumbered the parcels. The Smith Court found that the creditor’s second lien was wholly unsecured and accordingly, void and subject to strip-off pursuant to 11 U.S.C. 506(d).
This decision shows the importance of considering a property’s value and potential real property value fluctuations prior to a creditor taking a second mortgage on non-homestead property owned by an individual. Failure to have at least $1.00 of equity at the time of a Chapter 13 bankruptcy filing could result in a creditor’s entire lien being voided.