Submitted by Cirus on Thu, 11/10/2011 - 09:28
Posted in
I need to decide whether I should file for chapter 13 bankruptcy. One of the questions I have is whether I can strip the second mortgage lien off my house and so reduce the amount I will have to pay back. My house is currently worth about $355,000 and I have a first mortgage of over $400k. I also have a secured home equity line of credit in the amount of $36,000. Is lien stripping allowed in Massachusetts bankruptcy courts? Thanks.
Lien strip in MA
For those who do not know what we are talking about here, lien stripping is a practice that arises under Section 506 (a) and (b) of the U.S. Bankruptcy Code. These sections allow Chapter 13 debtors to ask the Bankruptcy Court to convert a secured second mortgage or other secured loan into an unsecured debt. If the court agrees, the conversion of the debt to an unsecured loan can eliminate the monthly payment and reduce the debtor's total debt. A good thing. In theory, the practice can also be used with other types of assets and debts, such as in a situation where the debtor has a car with two loans. In any case, in order for loan stripping to work, the debtor must be in Chapter 13 bankruptcy (not Chapter 7, see below), and the fair market value of the house (or other asset) must be less than the first mortgage. In other words, only debtors whose houses are "underwater" can try this tactic.
Although some court in other federal districts have refused to allow debtors to strip a lien, as far as I know, the practice is allowed in Massachusetts bankruptcy courts. Perhaps another attorney with more bankruptcy experience can shed some light on this issue for us. Final note: If you file Chapter 13 Bankruptcy, strip your second loan, and then convert to Chapter 7, a Massachusetts Bankruptcy Court will likely reverse the lien strip. See, e.g., In re McDonough 166 B.R. 9 (Bankr.D.Mass.1994).
Lien Stripping
The Editor is spot-on. Lien Stripping is alive and well in Massachusetts, in proper Chapter 13 cases. Your example is the perfect scenario for it. Your $36,000 second mortgage would be considered unsecured debt, you would be relieved of making the scheduled monthly payment on it, the bank would get a share of the pot along with all other unsecured creditors, and upon completion of your plan, you will be discharged from paying it and the lien on your real estate would be discharged. If you don't complete your Chapter 13 plan, or it is dismissed or converted, the second mortgage could come back to life. Talk to a Massachusetts bankruptcy attorney who is experienced in Chapter 13 cases and explore your options. -- Mike Tremblay, Marlborough.