No Lien Stripping in Chapter 7 Bankruptcy, Says 7th Circuit

The Seventh Circuit Court of Appeals ruled that Chapter 7 bankruptcy filers cannot strip unsecured liens off their homes in bankrutpcy.

In Palomar v. First American Bank, No. 12-3492 (7th Cir. July 11, 2013), the Seventh Circuit for the Court of Appeals ruled that Chapter 7 bankruptcy filers cannot get rid of unsecured liens on their homes.

What Is Lien Stripping?

As explained in Nolo's bankruptcy books, people filing for Chapter 13 bankruptcy can get rid of second mortgages, HELOCs, and other liens on their homes if those liens/loans are unsecured. A lien is unsecured if the fair market value of the home is less than the amount of the first mortgage (or other senior lien). To learn more about how this works, see What Is Lien Stripping in Chapter 13 Bankruptcy?

Lien Stripping in Chapter 7 Bankruptcy

For many years, most courts did not allow people filing for Chapter 7 bankruptcy to strip off unsecured liens from their homes. But in an unpublished decision in 2012, a three-judge panel of the Eleventh Circuit Court of Appeals allowed a Chapter 7 debtor to strip off an unsecured loan in his bankruptcy. This created some hope among bankruptcy attorneys and their clients that other circuits or courts might allow lien stripping in Chapter 7 bankruptcy. (The Eleventh Circuit case is currently on appeal -- so the law may change in that Circuit.)

If you live within the Seventh Circuit, however, the answer is "no" -- if you file for Chapter 7 bankruptcy you cannot take advantage of lien stripping.