Last week, the Bankruptcy Appellate Panel (B.A.P.) of the Sixth Circuit Court of Appeals (the Sixth Circuit encompasses Kentucky, Michigan, Ohio, and Tennessee) ruled that a bankruptcy filer could strip off (remove) a second mortgage on her home that was unsecured in a Chapter 13 bankruptcy, even though she had recently filed for Chapter 7 bankruptcy and therefore would not be eligible for a discharge in Chapter 13 bankruptcy. In re Cain, 13-8045, 2014 WL 3397702 (Bankr. App. 6th Cir. 2014).
Here’s what this means.
In Chapter 13 bankruptcy, if you have a junior mortgage or lien (such as a second or third mortgage or a HELOC) on your home, you can strip it off (remove it) if the mortgage or lien is unsecured. This happens if your home is underwater, meaning the value of your home is less than the amount of the first mortgage. Because there is no equity securing the junior lien, bankruptcy law allows the lien to be stripped. The amount you owe becomes unsecured debt. (For more details on how this works, see Getting Rid of Second Mortgages in Chapter 13 Bankruptcy.)
In some instances it makes sense to complete a Chapter 7 bankruptcy and then soon afterwards file for Chapter 20 bankruptcy. This is informally referred to as a Chapter 20 bankruptcy. (Learn when Chapter 20 bankruptcy can help.)
Some courts allow lien stripping in Chapter 20 bankruptcy; others don’t. Only a few circuit courts have ruled on this issue – the Fourth Circuit Court of Appeals, the Eleventh Circuit Court of Appeals, and a Bankruptcy Appellate Panel of the Eight Circuit Court of Appeals. All of those courts have permitted lien stripping in Chapter 20.
With its recent decision, the B.A.P. of the Sixth Circuit has joined these other courts and approved lien stripping in Chapter 20 bankruptcy.