Mortgages Underwater? You Need a Chapter 13

Posted on June 22, 2015 at 1:00pm by

Lien stripping is an important tool in a Chapter 13 bankruptcy – it allows a person with more than one mortgage to get rid of (strip off) the second and/or third mortgages if the property value is less than the balance due on the first mortgage. For example, if your house is worth $100,000 and the principal balance due on your first mortgage is more than $100,000 (even by just a penny), any other mortgages on your property can potentially be removed through a Chapter 13 bankruptcy plan. These stripped off mortgages are then treated the same ways as other general unsecured debt, like credit cards; they are paid only a percentage of the balance, and upon successful completion of a Chapter 13 case, your house is free of these extra mortgages.

Many consumers wonder, however, if lien stripping is available in a Chapter 7 bankruptcy. Chapter 7 bankruptcy, unlike a Chapter 13, discharges most unsecured debts without requiring any payments. Here in Kansas City, the bankruptcy courts would not permit lien stripping in Chapter 7, and the United States Supreme Court has just ruled definitively on the issue.

In Bank of America, N.A. v. Caulkett, Docket No. 13-1421, 575 U.S. (2015), the United States Supreme Court held that lien stripping cannot be done in a Chapter 7, even if the first mortgage is completely underwater. The Court followed its reasoning in a prior case, Dewsnup v. Timm, 502 U.S. 410 (1992), which had held that a partially underwater mortgage could not be stripped in a Chapter 7 case. This new ruling means essentially that lien stripping in Chapter 7 is off limits – if you keep your house in a Chapter 7, you must repay all the mortgages (judgment liens are a different matter; talk to a Kansas City bankruptcy attorney about getting rid of judgment liens in a Chapter 7).

However, a Chapter 13 bankruptcy is still an excellent way to reduce the mortgage burden on your home if your property value has dropped significantly. The Supreme Court’s ruling in Caulkett should not prevent homeowners with an ability to pay from seeking relief from the burden of excessive mortgage debt.

How Kansas City Bankruptcy Lawyers Can Help You

Bankruptcy law is complex, and a bankruptcy attorney can help you understand your options with regard to protecting the equity in your home. If you have considered filing for bankruptcy, the bankruptcy lawyers at Sader Law Firm can answer your questions and help you get on the right path towards a debt-free future. Contact our offices to speak with a Kansas City bankruptcy attorney today to learn more about our services and how choosing bankruptcy can help you.