Can I Get Rid of Second Mortgages and Liens in Chapter 7 Bankruptcy?

If you file for Chapter 7 bankruptcy, you cannot get rid of a junior mortgage lien, home equity line of credit (HELOC), or a lien associated with a home equity loan.

Update: On June 1, 2015, the Supreme Court of the United States held in Bank of America, N.A. v. Caulkett that a debtor (bankruptcy filer) cannot strip off a junior mortgage lien in a Chapter 7 case. You can view the case here.

If you file for Chapter 7 bankruptcy, you cannot get rid of second mortgages, home equity lines of credit (HELOCs), or home equity loans. Filers in the Eleventh Circuit Court of Appeals, are no longer able to strip off (remove) these types of liens in Chapter 7 bankruptcy.

(Learn more about what happens to your home and mortgage in Chapter 7 bankruptcy.)

What Is Lien Stripping?

Lien stripping is a powerful tool that is usually only available in Chapter 13 bankruptcy. With lien stripping, you are allowed to get rid of junior liens on your home if they are wholly unsecured. What exactly does this mean?

What is a junior lien? Junior liens are anything other than your first mortgage. So they would include second or third mortgages, HELOCs, and home equity loans.

What does wholly unsecured mean? A lien or security interest is wholly unsecured if the equity in your property does not cover any of the lien amounts. For example, say your home is worth $500,000, your first mortgage is $550,000, and your second mortgage is $50,000. Since your first mortgage is greater than the equity in your home, there is no equity left to cover your second mortgage. If the lender were to foreclose on your home, the first mortgage holder would get $500,000 and the second mortgage holder would get nothing.

What happens to the junior mortgage? If a junior mortgage or home equity line is eligible for lien stripping, the formerly secured debt becomes unsecured debt.

To learn more about lien stripping, see the articles in Your Home and Mortgage in Chapter 13 Bankruptcy.

Lien Stripping Isn't Available in Chapter 7 Bankruptcy

You cannot strip off junior liens in Chapter 7 bankruptcy in any jurisdiction. At one time, the Eleventh Circuit Court of Appeals ruled that lien stripping could be available to Chapter 7 bankruptcy debtors as long as none of the liens were secured. In Re McNeal, Case No. 11-11352 (11th Cir., May 11, 2012); In re Sinkfield, No. 13-12141 (11th Cir. July 30, 2013). But most courts did not follow these rulings.

On June 1, 2015, in the Bank of America N.A. v. Caulkett case, the Supreme Court resolved the differing jurisdictional approaches by clarifying that bankruptcy courts cannot strip off a secured property lien in Chapter 7 bankruptcy. The Court held as follows:

A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under 11 U.S.C. § 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under Section 502 of the Bankruptcy Code.

States in the Eleventh Circuit

States within the Eleventh Circuit include Alabama, Florida, and Georgia. If you are filing for bankruptcy in one of these states, as of June 1, 2015, you are no longer able to strip off junior liens in Chapter 7 bankruptcy.

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