Chapter 7- lien stripping

[2011]

I have:

1st mortgage- never late
2nd mortgage: 10 months behind

1 car: valued KBB $8500, appraisal at car dealer $7000.... owe $7500/approx $600 month



I obviously want to strip the 2nd mortgage... not sure about the car yet

I understand somewhat about Chapter 13 lien stripping...One lawyer says basically, cant have any equity over the balance of 1st mortgage, 2nd mortgage gets converted to unsecured debt.....

Does it work the same for Chapter 7??

I had planned to file pro se but my circumstances have changed drastically over the past few days ( leaving me with doubts that I will have time and thus will need the lawyer to do legwork)

[IBroke]

Unfortunately, no stripping of 2nd mortgage in CH7.

[2011]

Unfortunately, no stripping of 2nd mortgage in CH7.

I just checked my notes... you are correct, no lien stripping HOWEVER my lawyer says there is a way to keep house in Chapter 7 and still get 2nd mortgage discharged

not sure of details and I suppose he wasnt 100% forthcoming since I havent hired him ( yet)

[2011]

I just checked my notes... you are correct, no lien stripping HOWEVER my lawyer says there is a way to keep house in Chapter 7 and still get 2nd mortgage discharged

not sure of details and I suppose he wasnt 100% forthcoming since I havent hired him ( yet)

so I got more info from another source.... apparently as long as I have no more than $5000 equity but am no more than $5000 upside down I can get the 2nd lien converted to unsecured and thus have it discharged in Chapter 7....
the 1st loan is safe as long as I stay current


gotta get home appraisal first

[despritfreya]

There is no published Case authority that allows for a lien strip in a 7 regardless of value and amount owed. Having said that, the underlying debt will be discharged in the 7 but the lien will survive. The lender will have the right to foreclose on the lien. Will it exercise that right is the question, considering that it must deal with the senior lien holder. You may want to try to negotiate a cash settlement after you are discharged. You, in essence, would be purchasing a lien release from the lender for some agreed amount.

Des.

[drowning123]

Listen to Des.

[2011]

the underlying debt will be discharged in the 7 but the lien will survive.

Des.

I do not understand this... how, after BK, is there still a lien if there is no debt ( because it is discharged)?? if there is a lien, isnt it now worth zero??

[IAmNewToThis]

Hi 2011

I myself recently went through a very similar dilemma as you are right now. I started a thread in the Chapter 13 portion of this site. If you care to read it you may see some similarity.
Des is correct. In a nutshell - if you file Chapter 7 and the second mortgage is deemed to be worthless because the first mortgage makes up the value of the home then it does indeed go into the unsecured 'pile' and therefore you will not have to pay it; however, and this is the catch, the second mortgagor still has a lien on the deed (therefore it never truly goes away) and may watch the market and wait until you either pay down (2, 5 or 10 years) your first enough that you now have equity, or the value of your home rises in which case you have equity. Either way, they will still come after you, it never truly goes away. There is a lot written on this subject on this site (of course your lawyer knows this and will eventually tell you) and is better explained in greater detail. It was because of this very reason I chose to file Chapter 13. There is a possibility however that you can cut a deal with the second lender somewhere down the road and have him remove the lien from the deed. If you read more you will find that it happens sometimes and sometimes it does not. Good luck.

[debee]

I agree with the others. Your home loan transaction has two parts: loan and lien.

Bankruptcy wipes out your personal liability on the loan. It doesn't address the lien.

[despritfreya]

I do not understand this... how, after BK, is there still a lien if there is no debt ( because it is discharged)?? if there is a lien, isnt it now worth zero??

Ok, let me see if I can explain.

Forget that this lender is the 2nd and forget that you are in a bk. Think of the lender as simply secured by something - be it a car, house, or whatever. A secured lender has two ways to collect. It can sue under the note (loan documents) you signed or it can take back the property you allowed it to use as collateral. This is called, in legal terms, an "election of remedies". The lender can elect to sue under the note and waive its interest in the collateral or it can elect to repossess the collateral, sell it, apply the sale proceeds to the loan and then sue for the "deficiency".

Now let's add in the bk factor. A bankruptcy discharge is a "permanent injunction" against the lender's ability to collect under the note. It does not affect its ability to take control over the collateral that secures the note. The lien passes through the bk unaffected. While this has always been true, the US Supreme Court solidified this in its 1992 Dewsnup decision, “a bankruptcy discharge extinguishes only one mode of enforcing a claim-namely, an action against the debtor in personam—while leaving intact another—namely, an action against the debtor in rem”. See Dewsnup v. Timm, 502 U.S. 410 (1992). This is why secured creditors are in a "higher class" than unsecured creditors. An unsecured creditor can only look to the note which is subject to the discharge.

Now let’s look at a secured creditor’s status. We know the creditor has a lien to back up the note. However either the creditor is "fully secured", "undersecured" or "wholly unsecured".

A "fully secured" creditor can sell the collateral and recover all of the balance owed on the note. An "undersecured" creditor can sell the collateral and pay off a portion of the note. A "wholly unsecured" creditor can sell the collateral, but after paying a lien holder that is ahead of it, gets nothing to apply to the note.

Dewsnup held that a secured creditor is secured in the sense that its claim is backed up by a lien on the collateral regardless of the value of the collateral. As a result, while the ability to enforce the note is discharged, the lien survives. Since there is no Plan of Reorganization in a Chapter 7, one cannot modify the rights of the lien holder. This is entirely different in the context of a Chapter 13 where the Code allows for the modification of the lien holder’s rights if the lien holder is wholly unsecured. See 11 USC 1322(b)(2). Most, if not all Circuits, have held that if the creditor is wholly unsecured under Section 506(a), then, Section 1322(b)(2) will allow a debtor to reduce the claim to a general unsecured claim.

I realize this may be a bit convoluted but it basically boils down to this: In a Chapter 7 the ability to collect the note is gone but the ability to enforce the lien remains. If you do not voluntarily pay the lender (pursuant to the terms of the note), the lender is free to exercise its rights to enforce the lien and take back the collateral even if there is no equity in the collateral.

Des.

[IBroke]

In our case, we can't file CH13 due to the limit on unsecured debt so we will be trying to settle as well after the CH7 discharge. If that doesn't work for whatever reason, we will file CH13 4 years later. I don't think property-values are going to go up that fast - if they go up at all (current value about $300K, balance 2nd mortgage: $150K, balance 1st mortgage: $560K - so it is WELL out of reach for the 2nd.).