Many people in today's world have two mortgages on their home. Multiple mortgage payments, car payments, student loans, as well as payments on other debts, can oftentimes cause financial hardship and may make bankruptcy an attractive option. In certain circumstances, the filing of a bankruptcy case can enable a debtor to eliminate a second mortgage on their home and the monthly payment of such second mortgage. In bankruptcy, this is commonly referred to as a "Strip off" and can be available in a Chapter 13 bankruptcy case. A strip off is not available in a Chapter 7 bankruptcy, which is the type of bankruptcy where unsecured creditors are not paid back any monies. In a Chapter 13 bankruptcy, a debtor is required to pay creditors back some percentage over a 3 or 5 year period of time, but a Chapter 13 bankruptcy can offer a substantial benefit when the "strip off" is available.
How Does Strip Off Work?
First, a strip off is only available in a Chapter 13 bankruptcy if the homeowner has more than one mortgage on the home. If there is only one mortgage on the home, a Chapter 13 bankruptcy will not allow for the altering of the terms or payments of that mortgage.
Whether a strip off is available requires an analysis as to: (1) the value of the home; (2) the amount owed on the first mortgage; and (3) the amount owed on any additional mortgages. In order to strip off a second mortgage in a Chapter 13 bankruptcy, the second mortgage must be "wholly unsecured." E.g., In re Fair, 450 B.R. 853, 855 (E.D. Wis. 2011). A mortgage is wholly unsecured when the value of the home is equal to or less than the amount owed on the first mortgage. For example, if the home is worth $200,000 and $205,000 is owed on a first mortgage and $25,000 is owed on a second mortgage, the second mortgage is considered "wholly unsecured." Under this hypothetical, a homeowner can eliminate the second mortgage upon the confirmation and completion of a 3 or 5 year chapter 13 bankruptcy plan. E.g., In re Leigh, 307 B.R. 324, 327 (Bankruptcy D. Mass. 2004). In other words, when the Chapter 13 bankruptcy case is completed, payments will no longer be owed on the second mortgage and the mortgage lien will be discharged from the home. On the other hand, if the value of the home is even slightly more than the balance owed on the first mortgage, the second mortgage will be partially secured and cannot be stripped off in a Chapter 13 bankruptcy case. For example, if the home is worth $200,000 and $199,000 is owed on a first mortgage and $50,000 is owed on a second mortgage, the second mortgage cannot be stripped off in a chapter 13 bankruptcy. In conclusion, the ability to strip off a second mortgage in a chapter 13 bankruptcy case rises and falls upon the exact balances owed on mortgages as well as the value of the home.
What is the date for valuing the home and mortgage balances to determine a strip off?
The Bankruptcy Court for the District of Massachusetts has recently issued conflicting decisions on the issue of what date is used for determining the value of the home and mortgage balances for purposes of calculating whether a chapter 13 bankruptcy debtor can strip off a second mortgage.
In In re Landry, Bankruptcy Judge Boroff ruled that the effective date of the debtor's Chapter 13 Bankruptcy Plan was the date on which the value of the property was considered when assessing whether a second mortgage could be stripped off. Bankruptcy Judge Boroff rejected the creditor's argument that the date of the filing of the Chapter 13 Bankruptcy case was to be used in assessing value of the home and whether the second mortgage was "wholly unsecured." The creditor advocated for that earlier date because the value of the property was greater than the balance owed on the first mortgage at that time, leaving the second mortgage partially secured. Bankruptcy Judge Boroff's ruling provides more flexibility to Chapter 13 Bankruptcy debtors as it allows them to simply seek the strip off at the appropriate time when the property value drops and/or the mortgage balances are greater.
Bankruptcy Judge Hoffman issued a conflicting ruling in In re Sarno, as he held that the date on which the debtor files the Chapter 13 bankruptcy petition is the date that the value of the home and the balances of the mortgages are considered for purposes of determining the availability of a strip off. Bankruptcy Judge Hoffman's decision provides less flexibility to bankruptcy debtors as the filing date freezes the value of the home and mortgage balances, which would seem to preclude a debtor from seeking a "strip off" at later dates when the value may be lower and/or the mortgage balances may be higher.
In conclusion, In re Landry holds that the effective date of the Chapter 13 Bankruptcy plan is used for determining home values and mortgage balance, while In re Sarno strictly holds that the date the Chapter 13 bankruptcy is filed is the date to determine the values and balances.