Minnesota residents no longer need to wonder if a second mortgage (or any junior mortgage) can be “stripped” in a chapter 13 case, thanks to a recent ruling by the Eighth Circuit Bankruptcy Appellate Panel. In this Minnesota case, In re Fisette, No. 11-6012 (8th Cir. BAP August 29, 2011), the appeals court sided with the ten other federal appeals court circuits which have approved lien stripping for wholly unsecured homestead junior mortgages. The debtor in Fisette was represented by the author of this article.
In Fisette, the debtor’s home appraised for $145,000.00, but the first mortgage had a balance owed of $176,000.00. This rendered the second and third mortgages unsecured by any actual value in the homestead. Accordingly, the debtor’s chapter 13 plan provided that under bankruptcy code section 506(a), the second and third mortgages ought to be considered as unsecured by any actual value, and therefore they were to be avoided or “stripped” from the homestead, meaning they would not have to be paid, except in part as unsecured creditors.
The appeals court agreed, noting that wholly unsecured junior mortgages are not protected by the anti-mortgage modification clause of section 1322(b)(2).
Under this ruling, junior mortgages can be stripped in chapter 13 if the value of the home is less the balance owed on the senior mortgage. If the home’s value is greater than the balance owed on the senior mortgage, then the junior mortgage is at least partly secured and it cannot stripped.
The long-overdue ruling in In re Fisette brings Minnesota in line with the rest of the country on the matter of lien stripping. Although a handful of Minnesota bankruptcy lawyers (including the author) have been practicing lien stripping for years, the result in the Fisette case removes all doubt regarding the validity of lien stripping in chapter 13.