Chapter 13 and 2nd Mortgage Lien

Chapter 13 and second mortgage lien can be a great combintation.  If the balance of the first mortgage is higher than the fair market value of the home, the homeowner can “strip” the second mortgage lien.  This means that after the homeowner successfully completes a chapter 13 bankruptcy plan, the second mortgage lien will be stripped, or entirely removed from the property.  The debt that is secured by the second mortgage lien is paid as an unsecured debt (like credit card debt) during the chapter 13 bankruptcy plan.  At the end of  plan, any remaining unpaid balance is completely discharged, or eliminated.  The result of this is that a homeowner is able to completely eliminate a seccond mortgage lien on thier home by completing a chapter 13 bankruptcy.  Owners of investment property may also get this relief.

In a recent Orlando bankruptcy case, the court ruled that where a husband and wife are the owners of the property, both the husband and the wife must file together.  In this case, a husband and wife owned an investment property together.  The balance of the first mortgage exceeded the fair market value of that property, so the wife filed a chapter 13 and second mortgage lien strip was requested. However, the wife filed without her husband.  The court denied the request, because the husband had not joined his wife in filing the bankruptcy.

The court emphasized the special nature of property by the entireties, a special form of property ownership that only applies to property acquired during marriage.  This Orlando bankruptcy judge stated that unless both married owners were joint debtors in a chapter 13 bankruptcy, a strip was not proper. The court was also impressed by the fact that the husband had recently discharged his debt on the second mortgage in a chapter 7.  The court did not feel it was right for the husband to get the benefit of a “chapter 20” bankruptcy, which has recently been rejected by the Orlando bankruptcy court.

This ruling requires both married couples to participate in a chapter 13 plan together.  I have written previously on this blog about how a married couple can get debt relief with only one spouse filing.  However, a joint filing is now required in Orlando if a married couple want the benefits of a second mortgage lien strip.

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