Stripping Off Wholly Unsecured Mortgages: Chapter 13 and Why to File – Overview of Bankruptcy, Part 7

Series: #12 0f 13

Our last post took a brief look at how to protect a co-debtor in a Chapter 13 bankruptcy. This article will discuss stripping off wholly unsecured mortgages.

Stripping: A Tool to Modify Unsecured Mortgages

One of the most valuable options to a debtor in a Chapter 13 case is the opportunity to modify a wholly undersecured second or other junior mortgage pursuant to 11 USC § 1322 – Contents of plan*(b)(2) which allows a Chapter 13 plan to 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 holders of unsecured claims, or leave unaffected the rights of holders of any class of claims (emphasis added).

In conjunction with 11 USC § 506 – Determination of secured status*(a), a second or other junior mortgage can be avoided in its entirety, be given a value of zero and treated as an unsecured claim. See In Re Goda, Case No. 99-80983 (January 10, 2000), In Re Twyman, Case No. 00-4437-FJO-13 (July 31, 2000), In Re Gyger, Case No. 00-14683-AJM-13 (May 2, 2001) In Re Bailey, Case No. 02-01074-AJM-13.

In order to avoid a second or other junior mortgage, it cannot be supported by any equity whatsoever. The decision rendered by the Court in Kelly vs. Countrywide Home Loans, Inc., Case No. 01-14607, Adv. Pro. 01-572 (June 17, 2002), however, reaffirms earlier decisions that completely unsecured mortgages may not be stripped in chapter 7 cases.

In order to attempt to strip the wholly unsecured junior mortgage, the debtor must know the exact date of filing payoff balance on the first mortgage (including any arrears) as well as at least one walk through appraisal from an expert willing to travel to testify as an expert if there lien strip draws an objection. The lien strip language must be included the plan filed with the court (located in Paragraph 11 of the model plan used in the Indianapolis Division) and the attorney needs to file either a separate motion to strip the second mortgage (if you believe the issue deals with valuation only) or an adversary proceeding (if you believe the issue is to determine the validity, priority or extent of a lien).

An adversary proceeding is likely the best course to choose; however, attorneys in the Indianapolis Division have a general belief that they are not arguing the validity of the debt (conceding that it is a valid debt), but are instead only arguing about the fair market value of the real estate which can be determine without an adversary proceeding.

In order to protect the debtor from potential problems with future transfers of the real estate, the attorney should be vigilant in obtaining proper service, should always make sure that an order avoiding a second mortgage contains the full and exact legal description, and that the order is properly recorded. The debt is not officially discharged until the Chapter 13 plan has been discharged.

Accordingly, large notes should be made on the file that the case cannot be converted to Chapter 7; otherwise the second mortgage is no longer avoided.

Next: Discharging Property Settlements in Divorce or Separation

* Source: Cornell University Law School Legal Information Institute


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*Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.