Vincent Howard and the Anaheim foreclosure defense lawyers at Howard Law, P.C., advise bankruptcy clients with mortgage problems about the possibility of "stripping" mortgages from their homes--that is, nullifying mortgages that are unsecured by any amount of debt. In the wake of the housing crisis, many homeowners are in this situation; their homes are worth less than they owe, so any second (and third, fourth, etc.) mortgage has no equity. Bankruptcy courts are permitted to treat this debt as unsecured, giving the creditor far fewer rights. In Fisette v. Keller, Chapter 13 debtor Michael James Fisette proposed to strip second and third mortgages, sparking a conflict that made it all the way to the Eighth U.S. Circuit Court of Appeals.
Fisette had three loans on his Minnesota home; the value of the property was less than the first, most senior, loan. When he filed for Chapter 13 bankruptcy, he proposed to strip the second and third mortgages. This means the first mortgage would be treated according to the laws affecting mortgages on primary homes; the second and third would be treated differently and would likely be near worthless. The bankruptcy court declined to confirm this plan, saying the law did not permit lien stripping; Fisette modified his plan but appealed the original plan to the Bankruptcy Appellate Court for the Eighth Circuit. That court reversed, siding with the Eighth Circuit and six other circuits in saying junior mortgage liens may be stripped when underwater. However, it remanded with orders to treat the two junior mortgages like any other unsecured debt, such as credit card debt. And it ruled that Fisette is eligible to strip liens even though he is a "Chapter 20" debtor ineligible for discharge.
The trustee appealed to the full Eighth Circuit, but that court did not decide the case. Rather, it declined to rule because the issue was not properly before it. The BAP had not made a final and appealable order because it remanded the case for the bankruptcy court to further consider Fisette's plan. When a case is remanded for "considerable further discretion," the appeals court said, no appeal is possible. In this case, the Eighth added, the bankruptcy court must use considerable further discretion on the Chapter 20 issue, which the appeals court suggested may indicate a lack of good faith by Fisette. Furthermore, the court noted, treating the junior lienholders like unsecured creditors raises doubts that Fisette can make payments under the plan that was confirmed. The Eighth dismissed the appeal for lack of jurisdiction, chiding all of the attorneys involved for wasting time, and left the issue to the bankruptcy court.
Vincent Howard and our San Bernardino County foreclosure defense attorneys discuss lien stripping whenever we have a bankruptcy client who is underwater and has second or higher mortgages. As the Eighth Circuit BAP noted, it is well established that filers may strip liens in that situation. Furthermore, a Chapter 14 bankruptcy may be helpful to people who are underwater but determined to keep their homes, by allowing them to catch up on late payments in a controlled and financially viable way. Our Riverside foreclosure defense lawyers counsel clients on this issue whenever appropriate, and can explain how to avoid some of the bad faith issues that may have raised the inappropriate objections to lien stripping in Fisette's case.
If you're considering bankruptcy as a way to avoid foreclosure and get out from underwater, Howard Law, P.C., can help. For a consultation with Vincent Howard and our experienced team of attorneys, call us today at 1-800-872-5925 or send us a message online.