Junior Mortgages & Chapter 13 Bankruptcy
As a rule, you cannot get rid of a mortgage on your home by using bankruptcy. Secured loans are different from unsecured debts like credit cards and personal loans because the security interest cannot be wiped out.
However, when it comes to second or junior mortgages, then the rule is not so clear cut. Our clients can sometimes get rid of junior liens by converting them to unsecured debt, which you can then wipe out at the end of a Chapter 13 bankruptcy. Contact our South Florida bankruptcy attorney for more information.
What Are Junior Liens?
A lien is a right to payment that attaches to property. When the asset is sold, lienholders must be paid first and anything leftover goes to the property owner. There are many types of junior liens that people have on their homes, including second mortgages, home improvement loans, home equity lines of credit, and homeowners’ association dues or assessments.
What Does it Mean to “Strip” a Lien Using Bankruptcy?
Lien stripping essentially means converting a lien to unsecured debt. Under the bankruptcy code, you can eliminate unsecured debts, so the conversion is the first step to finally eliminating the lien.
Of course, you do not actually get rid of the debt until you complete your Chapter 13 payment plan, which could take up to 5 years. You might also end up paying back some of your unsecured loans depending on your disposable income each month. Still, when done right, many debtors can eliminate a big chunk of their junior mortgages.
Is Lien Stripping Available in a Chapter 7 Bankruptcy?
Unfortunately, no. Courts were divided on this issue, with some courts in the country allowing a lien strip in a Chapter 7. But the Supreme Court clarified in Bank of America v. Caulkett (2015) that a debtor could not strip off a junior lien as part of a Chapter 7 bankruptcy. If voiding a junior mortgage is something you want to do, then discuss filing for Chapter 13 protection with your bankruptcy attorney.
When Can I Strip My Junior Mortgage?
You can strip a junior mortgage when the value of your home is less than the amount of your remaining loan balance. For example, imagine your home is worth $250,000. Your first mortgage is $275,000. In this example, there is no equity for any junior mortgage holder, which means you can strip their lien.
But imagine that your home is worth $280,000 and your first mortgage is still $275,000. There is $5,000 in equity left over. Because your second mortgage is not completely unsecured, you usually cannot strip it in bankruptcy.
When meeting with a lawyer, review all mortgages that you have on your property. Lien stripping is one of the primary advantages of filing for Chapter 13 protection, and it would be a shame not to use it.
Want to Learn More about Lien Stripping? Contact Us
The Plantation bankruptcy attorneys at Nowack & Olson have over 40 years of combined experience helping debtors break free of their debts. A fresh start is possible, but please call us to schedule your free consultation today at 888-813-4737.
Resource:
law.cornell.edu/supct/pdf/13-1421.pdf
