Lien stripping is a process available to debtors in bankruptcy that can remove junior mortgage liens on residential property, freeing property from burdensome mortgages that exceed the value of the property. After a lien strip, a homeowner is only obligated on the first mortgage, i.e. the mortgage having the most senior priority, which typically is the mortgage that was taken out first. The junior mortgage debt is wiped out. Lien stripping is a great option for those homeowners who want to remain in their home, whose first mortgage balance is not too much higher than the home value, and who can afford payments on the first mortgage.
Lien stripping in Minnesota has been a hot topic for the last couple years. Up until a recent decision issued by the Bankruptcy Appellate Panel of the 8th Circuit in Fisette v. Keller (In re Fisette), lien stripping was for the most part denied in Chapter 13 bankruptcy cases. It was not even tested in Chapter 7 bankruptcy cases. As of the writing of this blog post, Minnesota bankruptcy judges have been allowing lien strips to go forward, and motions to strip liens have been granted when sufficient evidence is presented establishing that the junior mortgages sought to be stripped are wholly unsecured.
Three important points to note with respect to the current status of lien stripping in Minnesota.
1. Lien stripping is only available when the junior mortgages are wholly unsecured, meaning that the balance of first mortgage debt ties up completely the value of the property.
2. There is a chance that lien stripping in Minnesota may ultimately be struck down if the 8th Circuit Court of Appeals rules at some point in the future that lien stripping runs counter to applicable bankruptcy law. This would not affect any cases where lien stripping has already been approved.
3. It is highly doubtful that Minnesota bankruptcy judges would approve lien stripping in Chapter 7 cases because unlike in Chapter 13 cases where “unsecured” mortgage creditors are receiving a portion of their investment back through payments made through a confirmed plan, these same creditors in Chapter 7 bankruptcies would often receive nothing. This is not to say, however, that lien stripping in Chapter 7 cases has not been successfully accomplished with the voluntary acquiescence of the creditor, but a debtor should not go into a Chapter 7 expecting this cooperation.
In a market where many home values have not recovered from the real estate crash in 2008, lien stripping is an attractive option. It allows homeowners to remain in their homes without the burden of suffocating unsecured mortgage debt.