Stripping Off Unsecured Debt in Chapter 7 Bankruptcy

Thu, May 24, 2012


Stripping Off Unsecured Debt in Chapter 7 BankruptcyA recent decision by the Eleventh Circuit Court, re McNeal No. 11-11352, created quite a stir in the offices of bankruptcy lawyers throughout the Southeast United States.  The decision of the court in this case is significant. It states that unsecured debt should also be able to be “stripped off” in Chapter 7 bankruptcies—not just Chapter 13 cases. This is the first circuit court to uphold this decision, though many cases relating to this issue have been brought to circuit courts of appeal.

What are the implications of In re: Lorraine McNeal, No. 11-11352?

This new decision differs from previous court decisions because the 11th Circuit Court decided that a completely unsecured loan could be stripped off within the wording of 506(d). The Court holds that previous decisions were dealing with partially unsecured loans and the idea of stripping that type of debt only. They found that nothing was preventing completely unsecured loans from being totally stripped off in Chapter 7 bankruptcy. Here is a link to the decision.

And you may be asking, “What does this mean in plain English?” Let us break down the parts of the decision to get a better handle on it.

  • Chapter 7 Bankruptcy is for individuals, partnerships, corporations, or other business entities.  Consumer debtors must pass a means test to determine eligibility. Those filing Chapter 7 bankruptcy will not be using a payment plan to pay off debts but instead sell off property to pay their debts. Some property can be kept and sometimes debts are forgiven if there is no property to sell and certain other circumstances exist.
  • The Eleventh Circuit Court is located in Atlanta, Georgia. It is a United States Court of Appeals and hears cases for part of the southeastern United States (Alabama, Georgia, and Florida). It decides most of its cases from briefs.
  • Unsecured debt is something that does not have collateral or a lien on specific assets. Some examples include credit card debt or personal loans for small purchases. This case brings up another important type of unsecured debt—second mortgages on property worth less than the whole of the first loan.
  • Secured debt is something that has an asset or collateral attached to it. The usual examples are car loans or home mortgages.
  • Partially unsecured debt is a lesser-known type of debt. It occurs when the asset is worth less than is owed for the property. Therefore, you have a partially unsecured debt if you owe $100,000 dollars for something worth $25,000–$25,000 of the debt is secured and $75,000 is not.
  • Strip down of a loan is when you make the value of the loan equal to the actual value of the property, rather than the full amount of the loan. This is quite helpful for reducing the amount you owe. It is also sometimes referred to as “cram down”.
  • Strip off of a loan means you remove secondary loans on property if the value of the property is less than is owed by the first loan. This makes the second loan an unsecured debt and it can be “stripped off” like other types of unsecured debts.
  • 506(d) is part of the US Bankruptcy Code that deals with Creditors, Debtors, and the Estate. This particular section deals with whether or not a debt is secured. The exact wording is found here.


I hope that these definitions gave you a better understanding of what the recent decision in re: Lorraine McNeal, No. 11-11352 means. Anyone who is filing bankruptcy should take notice of this important decision. Many people were filing Chapter 13 for reasons that relate to stripping off a second loan. Now, those filers should take notice and ask their attorney if Chapter 7 bankruptcy may work for them. There is sure to be many attorneys working to decide if this new decision is beneficial to their clients—we know SmithLaw is.

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