When it comes to a mortgage on your residence, you can surrender your home and discharge the deficiency on the mortgage. Conversely, you could keep your home and continue to make the payments. But you generally cannot discharge the mortgage debt and keep your home. But there is a technique known as lien stripping whereby a mortgage is eliminated and you can keep your home. This technique is called “lien stripping,” and is available only under very specific circumstances.
This technique is not available for Chapter 7 bankruptcies. It is only available in Chapter 13 bankruptcies. For an explanation of the difference between Chapter 7 and Chapter 13 bankruptcies, see my article entitled “The Difference Between Chapter 7 and Chapter 13, and Which One Is Right For You.” Lien stripping cannot be performed on the primary mortgage on your residence. It can only be accomplished on a “junior” lien such as a second mortgage, third mortgage, or home equity line of credit, for example. You cannot strip out the lien on your home for unpaid property taxes. You can only strip a junior lien if it is “wholly unsecured.” That means that the total amount you owe on your first mortgage is greater than the market value of your home and there is not even $1.00 of equity in the junior lien.
The junior lien must be treated as a lien strip in your Chapter 13 Plan. The lien strip is memorialized in the Order Confirming Plan. For an explanation of Chapter 13 Plans and Orders Confirming Plan, see my article entitled “Confirmation of a Chapter 13 Repayment Plan.”
After the Plan is confirmed, the junior lien on your residence will be treated as an unsecured debt throughout the life of your case. For an explanation of unsecured debt, see my article entitled, “The Difference Between Chapter 7 and Chapter 13 Bankruptcy, and Which Chapter is Right For You.” Provided that you get to the end of your case and you receive an Order Discharging Debtor, you can record the Order Confirming Plan and the Order Discharging Debtor at the Register of Deeds in the County in which your home is located. At that point, the junior lien ceases to exist.
The above information is a general overview and is not intended to be used as legal advice. If you are considering filing for bankruptcy, the best thing to do is call our office at 248-557-3645 and schedule a free consultation so you can receive advice which is tailored to your specific circumstances.
By: Michael Benkstein, Esq.
Managing Attorney, Bankruptcy Department
The Law Offices of Joumana Kayrouz, PLLC