In some instances, debtors will have the right to ask the Bankruptcy Court to remove certain liens or mortgages with respect to property as part of the debtor’s bankruptcy case. It helps to protect the Debtor’s exemptions and to balance the interests of creditors.
Stripping Unsecured Second and Other Junior Mortgages
In a Chapter 13 case, a completely unsecured second mortgage can be removed from real property, even if the property is the debtor’s homestead. In order the qualify the property must be worth less than the amount owed on the first mortgage. The mortgage must not be protected by any equity and it is an either/or proposition, meaning that even a miniscule amount of equity renders the entire mortgage in question ineligible for stripping. This relief is available effective upon the debtor’s discharge, which occurs at the end of the Chapter 13 case. This same analysis would also apply to any junior mortgage where there is no equity to protect the mortgage. A motion must be filed with the Court and the creditor is provided with an opportunity to contest the value of the property and other facts.
Pursuant to the recently determined McLean decision by the 11th Circuit Court of Appeals, this relief is also available in Chapter 7 cases.
Liens Granted on Existing Personal Property to Secure New Loans
In instances where a Debtor has pledged personal property (not in the case of a vehicle) they already owned for a new loan, the liens created by these transactions are typically avoidable in bankruptcy if the assets are otherwise be protected by an exemption in favor of the debtor.
Judgment Liens Against Homestead Property
If a creditor obtains a judgment against a debtor before a bankruptcy case is filed, then the creditor can record the judgment to perfect a lien against certain assets of the debtor. A properly perfected and recorded judgment creates a lien against real property owned by the Debtor. Such a lien does not attach to the Debtor’s homestead property. During a bankruptcy case, a debtor has an opportunity to obtain a relatively inexpensive declaration from the bankruptcy court, which can be recorded in the public records that a lien with respect to homestead property has been avoided. This may allow the debtor to more easily sell the property in question without the title person attempting to convince them to pay the lien (even though they do not have a valid lien). It also serves to protect equity which may be accumulated before or after the bankruptcy from being available to creditors should the asset lose its character as homestead property in the future.