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Chapter 13 and lien-stripping

Florida residents who are underwater on their homes may be interested in a September 2016 bankruptcy case that looked at stripping second liens from homes in Chapter 13 bankruptcy. In the case, the ex-husband of a woman deeded her his interest in the home via a quitclaim deed after their divorce. The woman then filed for Chapter 13 bankruptcy and proposed a plan that would strip the junior lien from the home.

The creditor holding the junior mortgage objected to the plan, arguing that the lien couldn’t be stripped because the ex-husband still had liability for it. The bankruptcy court disagreed, however. It found that since the home was worth less than what was owed on the first mortgage, nothing was available to secure the second mortgage. This meant that it could then be stripped from the home in the woman’s Chapter 13 bankruptcy plan.

The court’s decision meant that the woman would be responsible for making payments on the second mortgage only to the same extent that her plan required her to make payments for her other unsecured debts. At the end of the repayment plan period, the remaining balance on the lien would be discharged, meaning she would have no further responsibility for repaying it. The court also said that the debt could continue with the ex-husband as an unsecured debt rather than as a secured one.

The possible ability to strip second mortgages in Chapter 13 bankruptcy might make the chapter a better option for some debtors. If they are underwater in their homes, it is possible that the second liens may be stripped away. When a lien is stripped, it means that it no longer is secured by the property. It is then treated just like the person’s other unsecured debts, meaning that it will be discharged if the repayment plan is successfully completed. An lawyer can provide further information in this regard.

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