Tag Archives: lien-stripping

Options for your Real Estate in Bankruptcy

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One of the primary concerns debtors have when they file a Chapter 7 or Chapter 13 case is what will happen to their home. Bankruptcy law provides a debtor with a variety of exemptions which remove certain assets from being included in the bankruptcy estate. Your home typically falls within the exemptions and filing a bankruptcy may even positively impact your real property holdings.

Lien Stripping

When you own a home that is not worth as much as you owe on your mortgage, or you have multiple mortgages on it, you may be allowed to strip or remove a lien. In a Chapter 13 case, a debtor may be able to prove that an underwater home does not have sufficient value to support the inferior mortgages. As a result, the second or third mortgages can be treated as unsecured debt in your repayment plan. This effectively removes the mortgage lien from your home and allows you to pay a typically small percentage of what is owed on your loan.

Cramdown

In some cases, you may have the option to negotiate with your mortgage lender to reduce the applicable interest rate or re-amortize your loan. By renegotiating your mortgage loan, you can obtain a lower monthly payment which can allow you to remain in your home.

Surrender

A debtor who wants to get out from under his or her mortgage loan can surrender the home back to the lender in a bankruptcy. The mortgage lender must accept the surrender of the home as full satisfaction of the enter loan amount because any remaining deficiency balance is treated as unsecured debt in the filing. In other words, if you file a Chapter 7 case the deficiency balance will be discharged in full. If you file a Chapter 13 case, it will be treated as an unsecured debt under your Chapter 13 plan and you will pay pennies on the dollar owed.

If you have questions about filing for bankruptcy protection, we have the answers. Call us today to schedule your initial consultation. Our office is located in Melbourne, but we proudly serve individuals and businesses across the State of Florida.


What Happens to my Real Estate in Bankruptcy?

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If you are planning to file for bankruptcy protection, you may be worried about what will happen to your home. Bankruptcy law provides a debtor with numerous exemptions which safeguard assets from being included in the bankruptcy estate. Additionally, many debtors do not realize that their real estate can be positively affected by your filing.

Lien Stripping

A debtor who owns a home with more than one mortgage on it may be eligible to strip the inferior lien on it. To take advantage of the lien stripping process, you must be “underwater” on your mortgage. In other words, the value of your home must be less than what you owe on your first mortgage loan. The argument is that the home does not have sufficient equity to support the second (or third) mortgage loan, so the inferior liens should be treated as unsecured debt, which effectively strips the lien from your home.

Cramdown

In some cases, a debtor may be able to negotiate better contract terms with their mortgage lender. Most commonly, you can lower your interest rate or re-amortize your mortgage loan. This could result in you having a lower monthly payment which, in turn, can help you afford to keep your investment property.

Surrender

If you are underwater on your home and you want to get out from under the debt, a debtor is allowed to surrender the real property back to the mortgage lender. The surrender is treated as “payment in full” because any remaining balance is treated as unsecured debt. If you file a Chapter 7, your unsecured debt is usually discharged or eliminated in full. In a Chapter 13 case, your unsecured creditors are typically paid a very small percentage, if anything, on what is owed.

If you are interested in learning more about how a bankruptcy filing could provide you beneficial options for your real estate holdings, contact Faro Crowder, PA to schedule an appointment.


Stripping Off Junior Mortgages in Bankruptcy

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The Eleventh Circuit recently held that a debtor is allowed to “strip off” an unsecured junior mortgage in a “Chapter 20” bankruptcy case. While Chapter 20 bankruptcy is not a valid chapter in the Bankruptcy Code, the term refers to a debtor who files back-to-back Chapter 7 and Chapter 13 bankruptcy cases. A junior mortgage is stripped or considered to be unsecured when there is insufficient equity to cover the first mortgage. If no equity exists to secure the inferior liens, they can be treated as unsecured and dischargeable.

In the case before the Eleventh Circuit three-judge panel, the debtor, Tahisia L. Scantling, received a discharge in her Chapter 7 case then filed a Chapter 13 case a year later. Scantling claimed that the bank’s second and third liens on her home where wholly unsecured and should be voided under 11 U.S.C. §§ 506 and 1322(b). The bank argued that the ability to lien-strip was contingent on the debtor being able to receive a discharge and Scantling was not eligible for discharge in her Chapter 13 case.

U.S. District Judge Harvey E. Schlesinger wrote the Circuit court’s opinion and stated: “The BAPCPA [Bankruptcy Abuse Prevention and Consumer Protection Act of 2005] did not amend §§ 506 or 1322(b), so the analysis permitting strip-offs in Chapter 20 cases is no different than that in any other Chapter 13 case.” Thus, debtors in so-called Chapter 20 cases can void inferior liens through Chapter 13 despite being unable to obtain a discharge.

If you are fortunate enough to live in the Middle District of Florida, the issue raised in the Scantling case may not arise. With a well thought-out strategy before filing your Chapter 7, you can strip wholly unsecured liens under In re: Lynette Malone/Wilmington Trust, NA v. Lynette Dais Malone and McNeal v. GMAC Mortgage, LLC in your Chapter 7 case.

If you have wholly unsecured junior mortgages and you are delinquent on your first mortgage loan payments, it may be wise, if you qualify, to strip and discharge the inferior liens in a Chapter 7, then file a Chapter 13 in order to catch-up and modify you first mortgage loan. However, if you are current on your first mortgage loan payments, there is no reason to file the Chapter 13 case. You can simply strip the junior liens in your Chapter 7, which saves you time and money. Additionally, the Middle District of Florida has a highly successful mortgage modification program. To learn more about it, please read our blog titled “Florida’s Mortgage Modification Mediation Program.”

If you have questions regarding stripping wholly unsecured junior mortgage liens or filing for bankruptcy protection, contact us for a free consultation.


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