Lien Stripping Becoming a Reality for Minnesotans in Bankruptcy

Recent Case Opens Door to Removing Second Mortgages in Bankruptcy

The mortgage fallout has left many homeowners underwater on their mortgages. The stagnant housing market has left many homeowners feeling trapped in a house they can't afford to keep and can't afford to sell.

National newspapers have made headlines with articles highlighting the benefits of stripping off second mortgages in a Chapter 13 bankruptcy. While this process appealed to many Minnesotans, it was not approved by our courts. Minneapolis bankruptcy attorneys typically tackled these problems by negotiating a settlement with a reduced payout to the second mortgage companies.

Now, a recent case may simplify the process, allowing homeowners to remove their second and third mortgages through a lien strip, eliminating the need for negotiation with mortgage lenders.

The Basics of Lien Stripping

When an individual files Chapter 13 bankruptcy they set up a plan to repay creditors over a period of three to five years. There are two kinds of creditors that are paid, secured creditors - who must be paid - and unsecured creditors. In a typical Chapter 13 bankruptcy, secured creditors are paid off with unsecured creditors receiving only a portion of what they are owed. The balance owing to unsecured creditors at the end of the bankruptcy is discharged upon the conclusion of the plan.

When a home's equity is insufficient to cover any part of the second or third mortgages, those mortgages may be subject to being stripped. The process of lien stripping in a Chapter 13 will convert the second and third mortgages from secured debts to unsecured debts.

It is important to note that lien stripping will not change the terms of the first mortgage. The first mortgage must be paid. However, the elimination of the second mortgage debt may mean the difference between being able to stay in a home and losing it.

New Case Challenges Court Ban on Stripping Off Second Mortgages

A recent Chapter 13 bankruptcy case challenged the court's long-held position regarding lien stripping. When local bankruptcy judge, Dennis O'Brien, refused to confirm a Minnesota man's Chapter 13 plan to strip off his second mortgage, he appealed. An appellate panel agreed with the man and approved his plan.

The appellate panel decision is being appealed to the 8th Circuit Court of Appeals. Although the outcome is not certain, attorneys believe the appellate panel decision will be affirmed to follow other jurisdictions. In the meantime, the appellate panel's position remains the law.

Source: www.twincities.com, "Bankruptcy Made Easier: Appeals Court Decision Allows Stripping of Second Mortgages" 13 November 2011, John Welbes

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