by: Baran Bulkat, Attorney
If you satisfy certain requirements, you can eliminate a second mortgage, home equity loan, home equity line of credit (HELOC), or other junior lien from your house in bankruptcy through a process called lien stripping. In most jurisdictions, lien stripping is not allowed in Chapter 7 bankruptcy cases (it’s typically limited to Chapter 11 and Chapter 13 bankruptcies). But the 11th Circuit Court of Appeals (which has jurisdiction over Alabama, Florida, and Georgia) has recently decided that you may be able to use lien stripping in a Chapter 7 case.
Lien stripping is a process that allows bankruptcy debtors to strip off (eliminate) wholly unsecured junior liens (such as second mortgages, home equity loans, and HELOCs) from their homes. In most cases, you can only get rid of your second mortgage or other junior lien if you file for Chapter 13 bankruptcy. But recent appellate court decisions in the 11th Circuit may allow lien stripping in Chapter 7 bankruptcy in a handful of states including Alabama, Florida, and Georgia. (To learn more about lien stripping, see Removing (Stripping) a Second Mortgage in Bankruptcy.)
Depending on the rules in your jurisdiction, you will need to file a lien strip motion or adversary proceeding in your bankruptcy case, give notice to the creditor, and explain to the court why you should be entitled to strip your junior lien.
In general, if you want to eliminate a junior lien from your home, that lien must be wholly unsecured. This means that the balance of your first mortgage (or other senior liens) on the property must be greater than the value of your home. In that case, the junior lien will be treated as an unsecured debt and eliminated once you complete your bankruptcy and obtain a discharge.
Example. Michael’s house is worth $200,000. He has a $250,000 first mortgage and a $50,000 home equity loan on the house. Michael’s home equity loan is considered wholly unsecured because the balance of his first mortgage exceeds the value of his home. This means that he may be able to take advantage of lien stripping to eliminate his home equity loan in bankruptcy.
In order to strip your junior lien in Chapter 13 bankruptcy, you generally have to make all of your plan payments, complete your bankruptcy, and obtain a discharge. But some courts have allowed debtors to take advantage of lien stripping in Chapter 13 cases where they were not entitled to a discharge because they had recently received one in a Chapter 7 bankruptcy. The practice of filing a Chapter 13 bankruptcy shortly after a Chapter 7 is commonly referred to as a Chapter 20 bankruptcy and may preclude you from using lien stripping in your Chapter 13.
In most jurisdictions, lien stripping is not allowed in Chapter 7 bankruptcy. But in a few recent cases, the Eleventh Circuit Court of Appeals ruled that debtors can use lien stripping in Chapter 7 bankruptcy to eliminate their wholly unsecured junior liens. In re McNeal, 2012 WL 1649853 (11th Cir. May 11, 2012), In re Sinkfield, No. 13-12141 (11th Cir. July 30, 2013).
This means that bankruptcy debtors in Alabama, Florida, and Georgia may now be able to take advantage of lien stripping in Chapter 7 bankruptcy. But keep in mind that whether your lien strip motion will be granted still depends on the facts of your case and the judge assigned to your bankruptcy.
Whether you can use lien stripping in Chapter 7 bankruptcy is a highly debated issue. In addition, the Sinkfielddecision has recently been appealed to the U.S. Supreme Court. If the Supreme Court agrees to hear the appeal, it may reverse the 11th Circuit’s ruling.
This means that if you live in Alabama, Florida, or Georgia and wish to strip off your junior lien in Chapter 7 bankruptcy, talk to a knowledgeable bankruptcy attorney in your area to learn more about your options.