April 20, 2009

Stripping Off Your Second Lien on Your Primary Residence in a Chapter 13

Due to the falling value of real estate, many borrowers today are “upside down” on their home mortgages and could greatly benefit from wiping out their junior liens. In certain cases, bankruptcy can accomplish that. Although section 1322(b)(2) of the Bankruptcy Code is clear that debtors cannot modify any secured loans which are secured by the debtor’s principal residence during their Chapter 13 bankruptcy, courts have found that this section of the Code does not apply when a loan becomes wholly unsecured, such as by the value of the home decreasing due to the market. In the Ninth Circuit (which includes California and Idaho, among others), courts allow such unsecured liens to be “stripped off”. Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002). In order to benefit from this lien stripping, however, the debtor must complete all their Chapter 13 plan payments (which could take 3 to 5 years), and the debtor must receive a discharge. The stripped lien is treated the same as the other unsecured debt in the Chapter 13 and is usually paid pennies on the dollar.