When Can You Strip Away A Second Mortgage In Bankruptcy?
New York law says that judgments, as well as first and second mortgages, are liens against real property. This means that once a judgment is issued against the client, it acts as a lien against their estate, along with a mortgage or home value line of credit (“HELOC”) on the property. These are secured debts that must be paid when one party refinances or sells their home.
Under New York State law, a lien can be “dispossessed,” meaning removed as a lien against the property and converted to unsecured debt, only if the first and/or second lien exceeds the value of the house. In addition, under New York State law, the “dwelling exemption” of $50,000 per spouse takes priority over the judgment privilege. Therefore, if the first and/or second mortgage, as well as the homestead exemption, exceed the value of the property, the judicial lien will be “stripped.”
In order to withdraw the lien, an application must be filed in the district court in which the judgment was served and the property exists.
In today’s real estate crisis, many homes are “under water”. This means that the value of the home is less than the value of the first or second mortgage.
In bankruptcy court, it is very common to strip a judgment lien if it is not secured by the value of the property. A lien foreclosure in bankruptcy court means that the debt has turned into an unsecured debt, which is either discharged in full in a Chapter 7 bankruptcy, or repaid under Chapter 13 bankruptcy for pennies on the dollar.
Likewise, a second or third mortgage may be forfeited in bankruptcy proceedings if the amount of the second or third mortgage is “not fully secured” by the real property. New York bankruptcy law states that as long as the mortgage is not 100% secured by the property, it can be stripped of unsecured debt. This means that if the value of your client’s mortgage, plus a homestead exemption of $50,000 per pair, exceeds the value of the property, the second or third mortgage will be stripped in Chapter 13 bankruptcy.
Until recently, a bankruptcy party was not allowed to strip a second or third mortgage under Chapter 7 bankruptcy. One recent case decided by Judge Eisenberg in the Eastern District of New York (Long Island), however, has ruled that an unsecured second mortgage may be stripped entirely in Chapter 7 bankruptcy.
However, if a second or third mortgage or mortgage is secured at one percent of the value of the property, the unsecured debt cannot be stripped.
Bankruptcy court judges in Westchester and Hudson Valley (Southern District of New York) have yet to rule on whether to follow Justice Eisenberg in dispossessing fully unsecured mortgages in Chapter VII cases. In fact, two Bankruptcy Appeals Court cases have ruled against foreclosure in Chapter 7 cases.