When you’re a homeowner, it’s amazing how easy it is to start accumulating additional liens on your property besides your first mortgage. Chapter 13 bankruptcy gives you a chance to get rid of those voluntary liens against your home.
What is lien stripping?
Typically, liens survive bankruptcy discharge as if it had never happened. Lien stripping is the exception to that rule. In Chapter 13 bankruptcy, if your home isn’t worth what you owe on it (including all liens), the lien might be “stripped” off, or “crammed down” to match the current market value of your house.
Mortgage liens are usually unstrippable. Except…
The United States Supreme Court’s decision in Nobelman v. American Savings Bank (June 1, 1993) unequivocally held that the full amount of a first mortgage survives a debtor’s chapter 13 plan, even though the house in question was worth less than the amount of the outstanding first mortgage. Interestingly, the Supreme Court’s Nobelman case did not address what happens when a second or third mortgage is wholly unsecured.
The Third Circuit held in McDonald v. Master Financial, Inc., (March 9, 2000) that a debtor could strip a second mortgage where the second mortgage was wholly unsecured. In McDonald, the debtor’s home was valued at $126,400, and the first mortgage was $127,633.33. The balance on the second mortgage was $46,846.42. The second mortgage was wholly unsecured because if the debtor’s home were sold, the first mortgage holder would have a shortfall of $1,233.33. This would leave zero funds for the second mortgage holder.
If you are lucky enough to reside in the Third Circuit (Pennsylvania, New Jersey, Delaware, and the Virgin Islands), you may be able to strip a second and third mortgage on your home in a Chapter 13 bankruptcy case.
What about tax liens?
Under Chapter 13, tax liens can be stripped off to the extent that they don’t attach to equity in the property, or they can be “crammed down” to match the actual value of the collateral. By contrast, Chapter 7 can’t help you with tax liens.
Learn more about bankruptcy and the IRS.
How can I incorporate lien stripping into my financial strategy?
An experienced bankruptcy attorney can research your lien situation and advise you on the likely outcome in Chapter 13 bankruptcy. It’s free to chat with me about your options – you can call or text me at 215.551.7109, or drop me a line.