Unsecured 2nd Mortgage Lien Stripping

[RNN]

I had a question regarding lien stripping or cram downs of a 2nd mortgage that is unsecured. Is this only possible in a CH 13 or can this be accomplished through CH 7? And if so is, an adversary complaint necessary or is it automatically discharged?

[justbroke]

It is only possible in a Chapter 13. There were one or two strange cases in which it worked in a Chapter 7, but predominantly, lien stripping (or lien avoidance) of a "wholly" unsecured lien is only possible in a Chapter 13.

In some Districts, a lien strip can be done as a contested matter by motion (motion to determine secured status and avoid lien), and others require it to be a complaint (complaint to determine secured status). If you're in Florida, lien stripping can be done as a contested matter (by motion).

[RNN]

If that is the case what happens to the unsecured 2nd mortgage after a chapter 7 discharge?

[RNN]

So there is no way to discharge an unsecured 2nd mortgage under Chapter 7?

[justbroke]

So there is no way to discharge an unsecured 2nd mortgage under Chapter 7?

You're not understanding how Bankrutpcy works. The responsibility to pay a mortgage is called a Promissory Note (or Note). This responsibility to pay, under the terms of the Note, is discharged in all bankruptcy chapters (Chapter 7, 9, 11, 12, 13). (Unless you reaffirm the debt, but that's an entirely different question.)

However, a Bankruptcy does not disturb the Mortgage (or Deed of Trust) which pledged the property as security for the Note. The mortgage is known as the security instrument. Technically, you received a loan (under a Note), but then pledged that if you don't pay, they can take the home (according to the terms in the security instrument). This second part, the security instrument, is not disturbed unless you have an Order of the court avoiding the lien (or pledged security).

If that is the case what happens to the unsecured 2nd mortgage after a chapter 7 discharge?

The provisions in the mortgage related to the property being pledged as collateral, are still in full force and effect. The 2nd mortgage holder may not attempt to collect money from you through litigation, lawsuit, or other means... but they can exercise their underlying State non-bankruptcy rights to foreclose upon the collateral.

Some debtors have had success, after a Chapter 7 discharge, in settling with the 2nd mortgage holder for an average of 10% to have them release the lien (satisfaction of mortgage).

[HHM]

This blog post answers your question.

http://askmethner.com/high-risk-strategy-emerging-for-dealing-with-2nd-mortgages/