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Underwater mortgages and loan-stripping in Florida

The housing crisis of a few years ago left millions of homeowners underwater. When the bubble burst, prices went down, in Florida and across the nation. And sometimes they went down far below what homeowners owe on their mortgages.

It's true that prices are generally going in a positive direction again. But according to a report yesterday in Forbes, there are still about 6.4 million homeowners who are underwater.

It is also true, however, that homeowners struggling with mortgage debt often have more options than they realize. For example, as we discussed in our recent article on loan-stripping, it may be possible for Florida homeowners who have second mortgages to eliminate that debt through bankruptcy.

More specifically, as we explain in our article, this involves Chapter 7 bankruptcy proceedings.

The federal appeals court for the circuit that includes Florida has upheld this type of loan-stripping.

The court's ruling means that, when the first mortgage is underwater, the mortgage holder on the second mortgage will not qualify as a secured creditor when the debtor goes through Chapter 7 bankruptcy. As a result, the obligation of the debtor to repay the second mortgage holder can be eliminated or "stripped" off in the bankruptcy process.

Courts in other parts of the country have reached differing conclusions about whether second mortgages can be stripped in this way by a debtor going through Chapter 7 bankruptcy.

In Florida, however, the possibility of doing so has been upheld by the recent court ruling. This could work to the advantage of underwater homeowners who choose to file Chapter 7.

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