Lien Stripping Your Home

October 12, 2015

Bankruptcy Code sections are like little boxes. Sometimes, the facts of a bankruptcy case will fit neat and tidy into a box. Other times, judges, trustees, and attorneys disagree whether a case can fit inside a bankruptcy box.

One example of this is lien stripping a home mortgage during a Chapter 13 bankruptcy case. The general rule allows a Chapter 13 debtor to strip-off an entirely unsecured junior mortgage. In other words, if you own a home worth $400,000, and the amount owed on the first mortgage is $400,000 or more, you can strip-off any junior mortgage (like a second mortgage or a HELOC). Because the senior mortgage is more than the equity available in the home, there is no equity to secure any part of the junior mortgage. The bankruptcy court can declare the junior mortgage an unsecured debt and strip-off the lien securing the property. The junior mortgage debt is paid at the same rate, or discharged, along with all other unsecured debts in the case.

Simple, right?

But what if the facts of your case do not fit neatly into this bankruptcy box? Take, for example, the case of Serge and Lori Boukatch of Arizona. The Boukatches filed Chapter 13 bankruptcy in 2011. The couple listed their home at $187,500 and two liens: a first mortgage to Wells Fargo Bank in the amount of $228,300; and a second lien to MidFirst Bank amounting to $67,484.96. The bankruptcy court subsequently converted the case, and the Boukatches received a Chapter 7 discharge in 2013.

In 2014 the Boukatches filed a second Chapter 13. They claimed that the prior Chapter 7 bankruptcy had discharged their personal liability on the MidFirst Bank junior lien and asked the bankruptcy court to strip-off its entirely unsecured lien. The bankruptcy court refused to lien trip in this situation because they were ineligible for a Chapter 13 discharge, but the 9th Circuit Bankruptcy Appellate Panel (“B.A.P.”) allowed the stripping.

The B.A.P. discussed three approaches to lien stripping in a Chapter 13 case, ultimately agreeing with the third approach: that nothing in the Bankruptcy Code prevents lien stripping even where discharge is unavailable. “Third approach” courts hold that the mechanism triggering the lien-strip is completion of the plan rather than discharge. Therefore, when a debtor completes his or her plan, the provisions of the plan, including lien stripping, become permanent. The B.A.P. stated that full repayment of the debt secured by the lien is not required because the Bankruptcy Code only requires full repayment of “allowed secured claims.” The panel concluded that “the wholly unsecured status of MidFirst’s claim, rather than Debtors’ eligibility for a discharge, is determinative.”

Bankruptcy is not a one-size-fits-all process. Fortunately, a skilled attorney can find the right-sized box for your bankruptcy issues. If you are experiencing financial difficulties, speak with an experienced bankruptcy attorney and discover how the federal law can help you.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

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