By Kitty J. Lin
In most jurisdictions today, the bankruptcy courts will not allow consumers to strip their junior mortgages in Chapter 7 cases. This lien stripping process is only available in Chapter 13 and Chapter 11 bankruptcy cases in most jurisdictions. Lien stripping is available in Chapter 13 bankruptcy cases when junior mortgages are wholly unsecured. This means that the value of the home must be worth less than the senior mortgages. For example if your house is worth $250,000 but your first mortgage is $300,000 and your second mortgage is $60,000 then you can file a Chapter 13 bankruptcy case to strip off the second mortgage or equity line of credit of $60,000. Once your Chapter 13 plan is successfully completed your junior mortgage is stripped off and the underlying debt is discharged in your bankruptcy case (depending upon circumstances) and you will no longer be liable for that debt.
The process above is assuming that your bankruptcy attorney filed the correct motions or adversary proceedings with the court to strip off the junior mortgages or equity line of credit. It is not advisable that you try to take this on if you are representing yourself in a Chapter 13 case as it is very complicated and you have a lot to lose if you file the motions or adversary proceedings incorrectly. As indicated previously the process above is also only available in Chapter 13 bankruptcy cases in most jurisdictions. That may be about to change. A petition for certiorari has been filed with the Supreme Court of the United States to address the question of whether lien stripping will be allowed in a Chapter 7 bankruptcy case.
Bank of America filed the petition for certiorari to review the judgment in the Eleventh Circuit U.S. Court of Appeals in Bank of America, N.A. v. Sinkfield. In this case, Mr. Sinkfield filed a Chapter 7 bankruptcy case. Mr. Sinkfield had two mortgages on his home. Mr. Sinkfield’s first mortgage was under water and therefore his second mortgage was completely unsecured. The court in this case allowed the junior mortgage to be stripped in his Chapter 7 case using the Folendore v. Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989) case. This case allowed the junior mortgage to be stripped from the property. Bank of America alleges that this runs afowl of the Dewsnup v. Timm case, 502 U.S. 410 (1992). The Sinkfield court indicated that the Folendore case was on point in this case and not Dewsnup.
Unfortunately, just because Bank of America petitioned the Supreme Court to review the case does not necessarily mean that the Supreme Court will agree to hear it. Hopefully the Supreme Court will decide to tackle this issue and provide an answer as to whether a junior lien can be stripped off in a Chapter 7 bankruptcy case. This will give bankruptcy lawyers another tool to help people with overwhelming debts.