Stripping Wholly Unsecured Liens

If you have more than one mortgage loan on your home and the house is underwater, then you may qualify to have one or more of your junior liens wiped out, so that you would not need to pay it.

A property is considered underwater when the total value of all mortgage loans on the property is greater than the value of the property itself.  If the property value is less than the value of the first mortgage, then the junior mortgage loans, home equity lines of credit, and judicial liens are considered unsecured.  In most cases, these “wholly” unsecured junior liens can be avoided or stripped from the property by the federal bankruptcy court.

“Lien stripping” as a bankruptcy concept began with the adoption of the 1978 Bankruptcy Code.  Before then, the bankruptcy court did not have the power to reduce the balances on secured debts like car loans and home loans.  Since 1978, home loans on the debtor’s principal residence have received special treatment under the Bankruptcy Code.  If such a loan is protected or “secured” by actual value in the home, the loan cannot be “stripped down” at all.  On the other hand, a second mortgage may not be protected if the first mortgage balance is higher than the value of the property, making the second mortgage wholly unsecured.

The statutory basis for being able to wipe out or strip off wholly unsecured liens on principal residences starts with 11 USC Sec. 1322(b)(2), which provides: “… the plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.”  If a person’s junior mortgage is wholly unsecured (and, therefore, no portion of the value of the home attaches to the junior mortgage), then the value of the junior mortgage holder’s secured claim is zero dollars and, in fact, there is no secured claim at all.  The junior mortgage holder only has an unsecured claim.  Because the junior mortgage holder does not hold a “claim secured only by a security interest in real property that is the debtor’s principal residence,” the person can file a Chapter 13 plan that provides to wipe out the debt and its associated lien.  That is what we call “stripping off” or wiping out the junior mortgage.

There is no U.S. Supreme Court decision that has considered this issue.  However, for the Ninth Circuit (federal) Court of Appeals, In re Zimmer, 313 R.3d 1220, at 1227 (9th Cir 2002) serves as precedent for this view and is applicable for bankruptcy cases in the western United States.

If your underwater property is not your principal residence, the “stripping” rules are even better in some situations.  We can explain that to you at your appointment.

Our office has wiped out about $15,000,000 in junior mortgages for our clients.  Normally, the procedure is fairly simple from the client’s viewpoint.  After we have prepared the court papers, including papers for the client to sign, the process sometimes does not require a court hearing.  It is possible to get a court order within about a month if no complications arise.

Of course, everyone’s situation is unique and it takes careful analysis to determine if this applies in a particular case.  This is why our office provides a free personal consultation with an attorney, so that we can analyze your specific circumstances and advise you of the best way to reduce your debts and save your property.