Stripping a Second Mortgage or Junior Lien in Chapter 13

How does stripping a junior lien in Chapter 13 actually work?

The starting point is 11 U.S.C. § 506(a). A creditor's allowed claim is secured only to the extent of the value of that creditor's interest in the property, and is unsecured to the extent the claim exceeds that value. If your home is worth less than the first mortgage balance, there is no value left for the second lienholder to reach, so its entire claim is unsecured.

One district's official procedure manual describes it directly: if the value of the collateral is less than the amount of a senior lien on the property, there is no equity in the collateral to support a junior lien, and the lien may be "stripped off" (Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)).

The wholly unsecured claim is then paid through the plan like other general unsecured debt — often at a fraction of the balance — and the lien itself is voided when the plan is completed.

• Establish the property's value as of the relevant date
• Establish the balance owed on every senior lien
• Ask the court to determine the junior claim's secured status under § 506
• Provide for the strip in the Chapter 13 plan
• Complete the plan payments so the lien removal becomes effective

What changes the answer in a lien stripping case?

Two facts drive almost everything: what the property is worth, and what the senior liens total. A junior lien with even a small amount of value behind it is treated very differently from one with none.

That distinction is written into the statute. Under 11 U.S.C. § 1322(b)(2), a Chapter 13 plan may modify the rights of holders of secured claims other than a claim secured only by a security interest in real property that is the debtor's principal residence. One district manual reads that limit this way: Chapter 13 debtors may strip off junior liens where there is no equity above the senior liens, but are not permitted to "strip down" a junior lien on their principal residence to the value of the collateral (Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)).

Whether the property is your principal residence, whether the lien is wholly or only partly unsecured, and whether valuation is contested all change the analysis.

What does federal law say about lien stripping?

Three provisions carry most of the weight. 11 U.S.C. § 506(a) sets the rule that a claim is secured only to the extent of the value of the creditor's interest in the estate's interest in the property, and is unsecured beyond that. Value is determined in light of the purpose of the valuation and the proposed disposition or use of the property.

11 U.S.C. § 506(d) then provides that to the extent a lien secures a claim that is not an allowed secured claim, the lien is void, subject to two exceptions in the statute.

11 U.S.C. § 1322(b)(2) supplies the limit specific to homes: a plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence.

Procedurally, one district's guidelines note that although an adversary proceeding may be used under FRBP 7001(2), a debtor may also obtain a valuation by motion or through the plan (CANB official material — Guidelines for Valuing Collateral 1.31.18).

• 11 U.S.C. § 506(a) — determination of secured status by collateral value
• 11 U.S.C. § 506(d) — a lien securing a claim that is not an allowed secured claim is void, with statutory exceptions
• 11 U.S.C. § 1322(b)(2) — the principal-residence anti-modification limit
• 11 U.S.C. § 502 — claim allowance and objections, which interacts with valuation

Where do local court rules change the procedure?

Substantive law is federal, but how you ask for the relief is local, and the differences are significant. Some districts require a standalone motion. Others build the request into the plan. Some require an adversary proceeding for a principal-residence strip.

In the Northern District of Florida, actions to determine secured status and strip a junior lien on a principal residence in Chapter 13 must be brought by motion, must include specific title language, and cannot be filed before the creditor files a proof of claim or the claims bar date passes, whichever is earlier (N.D. Fla. LBR 3012-2). Vermont requires the motion to be made in Part 3.2 of the debtor's plan, with the mortgage, its recording information and the valuation document attached (Vt. LBR 3013-1). Colorado requires a separate motion referenced within the proposed plan, and states that a separate adversary proceeding is not required (D. Colo. L.B.R. 3012-1). One Illinois manual takes the opposite approach for a wholly unsecured principal-residence lien, stating that a separate adversary proceeding is required (Bankr. S.D. Ill. official guidance — Chapter 13 Procedures Manual).

What does this look like in practice, start to finish?

Timing usually comes first. In the Northern District of Florida, a motion to determine secured status and strip a junior lien cannot be filed before the affected creditor files a proof of claim or the claims bar date expires, and a premature motion to value will be denied without prejudice (N.D. Fla. LBR 3012-2). That rule also requires a separate motion for each mortgage or lien the debtor seeks to strip.

Service is taken seriously because the relief runs against a specific party. One district's guidelines state that because a motion or plan seeking to value collateral seeks relief against a specific, identifiable party, the debtor must comply with the applicable service requirements (CANB official material — Guidelines for Valuing Collateral 1.31.18).

The finish line is plan completion, not confirmation. Vermont requires a proposed order specifying that the lien or mortgage is stripped only if the plan is completed, that the order is void if the case is dismissed, and that it is conditional pending a trustee certification (Vt. LBR 3013-1).

• Wait for the proof of claim or the claims bar date where local rules require it
• File a separate request for each lien
• Serve the creditor and the trustee under the applicable rules
• Carry the treatment through to the confirmed plan
• Complete plan payments; some districts then require a further order or certification

What documents and information are involved?

Local rules are unusually specific about the paperwork, because the court is being asked to void a recorded interest in real estate. The Northern District of Florida requires the motion to state all known parties who may have an interest in the mortgage, the loan number and recording information for every affected lien, the legal description and street address of the property, the basis of the valuation — private appraisal, county valuation, or other — and the balance due on and identity of the holder of every senior lien. The motion must also be verified or supported by an affidavit or declaration (N.D. Fla. LBR 3012-2).

Vermont requires attaching a copy of the lien or mortgage containing recording information, a clear description of the property, the document relied on to establish value, and a document listing every entity holding a lien of record with its recording reference and claim amount (Vt. LBR 3013-1). Maryland requires evidence of the property's value and, if senior lienholders have not filed claims, evidence of the amounts owed to them (Bankr. D. Md. official guidance — Local Bankruptcy Rule).

• Evidence of the property's value, and the basis for it
• Recording information for the lien being challenged
• Payoff or balance figures for every senior lien
• The legal description and street address of the property
• A verification, affidavit or declaration from the debtor where required

What should you ask a lawyer about your own case?

Lien stripping is one of the areas where a small procedural misstep can cost the relief entirely, and where valuation is genuinely adversarial. A local bankruptcy attorney will know which of the three procedural routes your district uses and what your judge expects on valuation evidence.

The questions worth writing down before a consultation are concrete ones about your numbers and your district's practice. Bring your mortgage statements, any recent appraisal or county assessment, and the recorded documents if you have them.

Cost is also a fair question. The Chapter 13 filing fee is $235 (28 U.S.C. § 1930(a)(1)(B)), plus a $78 administrative fee (Bankruptcy Court Miscellaneous Fee Schedule, Item 8). Attorney fees for lien-strip litigation are separate and vary by district and by whether the creditor objects.

• Is my second mortgage wholly unsecured on current values, or is there equity reaching it?
• Does my district require a motion, a plan provision, or an adversary proceeding?
• What valuation evidence does my judge expect, and do I need an appraisal?
• What happens to the lien if my case is dismissed or converted before plan completion?
• How does the added unsecured claim change what my plan has to pay?

Frequently asked questions

Can I strip a second mortgage in Chapter 7?

One district's official procedure manual states that lien stripping is not permitted in Chapter 7 cases (Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)). That is why an underwater junior lien is a common reason people compare the two chapters. Chapter 13 supplies the plan mechanism that Chapter 7 does not.

What if my home is worth slightly more than the first mortgage?

Then the junior lien is not wholly unsecured, and the analysis changes. Under 11 U.S.C. § 506(a), a claim is secured to the extent of the value of the creditor's interest in the property. One district manual explains that Chapter 13 debtors are not permitted to "strip down" a junior lien on a principal residence to the value of the collateral. Valuation therefore often becomes the contested issue.

Does the lien disappear as soon as my plan is confirmed?

Generally no. Vermont's rule requires an order specifying that the lien is stripped only if the plan is completed, that it is void if the case is dismissed, and that it takes effect only with a trustee certification that the debtor satisfied all obligations (Vt. LBR 3013-1). Districts vary, but conditioning removal on plan completion is a common pattern.

Does this work on a rental property or a second home?

The principal-residence limit in 11 U.S.C. § 1322(b)(2) applies to a claim secured only by a security interest in real property that is the debtor's principal residence. One Maryland rule addresses valuation and lien avoidance by motion for real property that is not the debtor's principal residence (Bankr. D. Md. official guidance — Local Bankruptcy Rule). Non-residence property is treated differently, and a lawyer should review your specific facts.

Do I have to file a separate case document for each lien?

In some districts, yes. The Northern District of Florida requires the movant to file a separate motion for each mortgage or lien it seeks to strip (N.D. Fla. LBR 3012-2). Other districts allow the request to be made through the plan. Check your district's local rules, or ask a local attorney which route applies.

What does it cost to file the Chapter 13 case itself?

The Chapter 13 filing fee is $235 (28 U.S.C. § 1930(a)(1)(B)), and an additional administrative fee of $78 is collected (Bankruptcy Court Miscellaneous Fee Schedule, Item 8). The statute permits installment payment for an individual commencing a voluntary or joint case. Attorney fees and any valuation or appraisal costs are separate and vary.

Can the creditor fight the valuation?

Yes. Colorado's rule provides that objections must recite the basis of the objection, including the amount and basis of the alternative value proposed by the objector, and that objections to valuation are considered in conjunction with the confirmation hearing (D. Colo. L.B.R. 3012-1). Where no objection is filed, that rule states the debtor's asserted value will be accepted by the court.

Sources

• 11 U.S.C. § 506 — Determination of secured status · official source
• 11 U.S.C. § 1322 — Contents of plan · official source
• 11 U.S.C. § 502 — Allowance of claims or interests · official source
• N.D. Fla. LBR 3012-2 — Motions to determine secured status and strip junior lien on debtor's homestead in Chapter 13
• Vt. LBR 3013-1 — Motion to strip lien or mortgage that is wholly unsecured in Chapter 12 and 13
• D. Colo. L.B.R. 3012-1 — Valuation of collateral and determination of secured status under 11 U.S.C. § 506
• Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)
• CANB official material — Guidelines for Valuing Collateral 1.31.18
• Bankr. D. Md. official guidance — Local Bankruptcy Rule
• Bankr. S.D. Ill. official guidance — Chapter 13 Procedures Manual
• 28 U.S.C. § 1930(a)(1)(B)
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8

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