Uncooperative Lenders Holding 2nd Mortgages On Underwater Homes Have Much To Fear From Lien-Stripping Homeowners Filing Chapter 13 Bankruptcy

Lien stripping in a Chapter 13 bankruptcy has been described as an unexpected financial life raft that underwater homeowners are jumping onto to escape crippling second mortgage debts and keep their homes.(1)

It applies in the case of a homeowner with two or more mortgages on their home. In short, it allows a homeowner with a home worth less than the amount owed on the first mortgage to reclassify the second mortgage debt (as well as 3rd, 4th, 5th liens, etc.) as an unsecured loan, thereby freeing the home from that lien. Depending on the debtor's financial circumstances, the now-unsecured debt may not have to be paid in full, and could possibly be wiped out for pennies on the dollar.

For links to resources of information in this regard, see Law on Rice: Lien stripping resources.

See also, Introduction to Cramdown and Lien Stripping for a technical discussion on lien stripping basics in bankruptcy that lawyers might find useful.

Go here for earlier posts on lien stripping a 2nd mortgage in a Chapter 13 bankruptcy proceeding.

(1) See In Re Pond, 252 F.3d 122 (2d Cir. 2001) for some case law that approves the "lien stripping" maneuver in Chapter 13 bankruptcy proceedings, in which the U.S. Court of Appeals for the 2nd Circuit held:

• We therefore join the Third, Fifth, and Eleventh Circuits, as well as the Bankruptcy Appellate Panels of the First and Ninth Circuits, in holding that a wholly unsecured claim, as defined under Section 506(a), is not protected under the antimodification exception of Section 1322(b)(2). See McDonald, 205 F.3d at 611; Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277 (5th Cir. 2000); Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357 (11th Cir. 2000); Domestic Bank, 249 B.R. at 838; Lam v. Investors Thrift (In re Lam), 211 B.R. 36 (B.A.P. 9th Cir. 1997), appeal dismissed on other grounds, 192 F.3d 1309 (9th Cir. 1999). But cf. American Gen. Finance, Inc. v. Dickerson (In re Dickerson), 222 F.3d 924, 926 (11th Cir. 2000) (explaining that, if the panel were to decide the issue on a clean slate, it would adopt the minority view, but that it was bound by the majority view because the Circuit had already adopted this view).

See also In re Bollerud, No. 08-12177 (Bankr. S.D. Cal. 2009) for an interesting ruling that allowed a junior lien to be stripped in a Chapter 13 case, even though discharge was not eligible to the debtor. According to the facts of this case, discharge was unavailable because the debtor had previously filed a chapter 7 petition, and the new bankruptcy laws prevented a subsequent discharge within 8 years of that filing in another chapter 7 or 4 years in a chapter 13. See Bankruptcy Law Network: Chapter 20: San Diego Bankruptcy Court allows Lien Stripping in Chapter 13 after Chapter 7.