Lien stripping is a way of removing an underwater second mortgage on a house in a bankruptcy proceeding. Thus, if a house has two mortgages, and the market value of home is less than the first mortgage, the second mortgage is basically unsecured. In a bankruptcy proceeding, if the second mortgage is unsecured, it may be removed or stripped. Here is an example. Let’s say your home is currently worth $350,000. You have a first mortgage in the amount of $400,000, and a second mortgage in the amount of $50,000. The equity in your home does not secure the second mortgage (it covers $350,000 of the first mortgage). If you were to file for Chapter 13 bankruptcy, you could remove the entire second mortgage from your property. In most jurisdictions, lien stripping is allowed in Chapter 13 bankruptcy only. However, in In Re McNeal, Case No. 11-11352 (11th Cir., May 11, 2012), the 11th Circuit ruled that a debtor could strip off a home lien in Chapter 7 bankruptcy if no part of the lien is secured by the home’s equity (this is referred to as being “wholly unsecured”). It distinguished this situation from that discussed in the U.S. Supreme Court’s decision in Dewsnup v. Timm, which said you cannot strip off partially an unsecured lien in Chapter 7 bankruptcy. The ruling is good news for debtors living in the 11th Circuit’s jurisdiction (Florida, Georgia, and Alabama). If you have a mortgage or lien on your home that is wholly unsecured (and in this day and age of plummeting real estate values, many people do), you can enjoy the many advantages of Chapter 7 bankruptcy and still be able to strip off the junior lien. Once the lien is stripped off, it will become unsecured debt and be discharged at the end of your Chapter 7 bankruptcy.
No comments:
Post a Comment