A strategy in Nolo’s The Foreclosure Survival Guide, 5th Edition is no longer available to distressed homeowners. On page 139, the author suggested that a homeowner with a residential property worth less than the mortgage balance on the first mortgage might be able to eliminate a junior lien (such as a second or third position lien or home equity line of credit) in Chapter 7 bankruptcy. The idea was that by using a lien stripping option, the homeowner could stop paying on a junior mortgage without fear of losing the house.
At the time of writing, some bankruptcy jurisdictions had indeed allowed the practice because of the similarity to Chapter 13 “lien stripping”—but most did not. Chapter 13 lien stripping permits a filer to wipe out an underwater junior loan and lien at the completion of a three- to five-year repayment plan. (For more information, see What is Lien Stripping in Chapter 13 Bankruptcy?)
In 2014, the question of whether lien stripping could be used in a Chapter 7 case was presented to the United States Supreme Court in the case of Bank of America, N.A. v. Caulkett, 135 S. Ct. 674 (2014). On June 1, 2015, the Court determined that a homeowner could not remove a junior lien associated with a residential property in Chapter 7 bankruptcy. A lender retains the lien right that allows it to foreclose on a property if the homeowner fails to pay an obligation secured by the property.
As a practical matter, the effect of this decision is as follows:
For more information about your home mortgage in Chapter 7 bankruptcy, read Will Filing for Chapter 7 Get Rid of My Mortgage?
Effective date: June 1, 2015