Can you reverse a stripped mortgage?

9 Replies

A 2nd Mortgage, for which I hold the Deed of Trust, was stripped during Ch. 13 bankruptcy in 2013. The value of the home was approximately the balance of the 1st mortgage at the time, so the court had no problem stripping my $70k balance. Since 2013, the property has appreciated significantly and now has over $200k in equity.

Question: Is there any way to reverse the bankruptcy court's decision to strip the 2nd mortgage now that there is more than enough equity to consider the note secured?

I realize the answer is probably "No", but thought I'd throw it out there.

Check with legal counsel, the stripping was to not allow it to be included in CH 13, yet does it not leave the lien still on title?

@Boyd McClean  I'll defer to those who know more than me (and that would be many many people on these boards) but my understanding is: 

(i) Chapter 7: the borrower is discharged but the lien stays attached to house (lots of rules about not calling the borrower, as they are personally discharged, so your only real exist it to start a FC - though some disagree on this point/are willing to risk it); and 

(ii) Chapter 13: the underwater lien is put through the plan, if it has no equity, it can be stripped from the house and 2nd debt is treated as being unsecured.  It then goes into the pool with the other unsecured debt, so likely that you receive very little.  In a chapter 13, the borrower must complete the plan for it to have effect, so a stripped loan can be reapplied in the event that the plan does not complete. 

Any of @Dion DePaoli  , @Bob Malecki , @Bill G. , or ,@Mike Hartzog,  will be a great resources to correct me if I'm pointing you wrong, but that is my very simplified understanding in a nut shell. 

@Sean M.  

Thanks for posting the article. Looks like that decision will apply to Ch. 7 and not Ch. 13, but I could be wrong. I'll keep an eye on that case.

   

@Paul Murch

You're not wrong - the bankruptcies in question are chapter 7s.  You might find that the court would use the opportunity to address the law of stripping secured creditors generally (maybe only mortgages, maybe to secured debt of every kind).  Similarly even if the court limits its ruling to Chapter 7s, the reasoning might result in Chapter 13s creditors challenging the equivalent provisions in Chapter 13. 

My guess, and its just a guess, is that there is going to be a change in the law around stripping - if they wanted to keep the law the same, they could have just not agreed to hear the case (as they did the year before).  With this affecting so many creditors now, I wonder if they are re-thinking whether the stripping provisions are having a negative impact beyond their intended effect. 

As far as I understand it the argument being poised will have impact on all second liens.  The basis seems to stem from the point that a Borrower may not devalue the collateral to suit their needs.  The point being essentially the Mortgagee should be allowed to survive frozen but attached if the Borrower is going to work through a plan.  It is an interesting angle to the argument and one that may lead to some new rules.  We will have to wait and see.

That said, this ruling will not affect past decisions most likely.  Bankruptcy code modifications generally do not create situations where past events can come back and challenge.  If the Supreme Court rules in favor of this practice I would guess it will be like a moving forward type thing.  Further for clarity, I am not sure a "re-attachment" would be within in the scope of the spirit of the argument.  They are not arguing for a look back, they are arguing for a never occurred vantage point.

I think in the case of the OP here, there is nothing to do and this ruling will not provide any alternative to that nothing to do.  

Is that what they call a "cram down" I keep hearing about? 

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