Friday, June 2, 2023

When Can You Strip Away A Second Mortgage In Bankruptcy?

New York law provides that judgments, as well as first and second mortgages, serve as liens against real property. This means that once a judgment is filed against a customer, it acts as a lien against their real estate, along with a mortgage or home equity line of credit (“HELOC”) lien on the real estate. Is. These act as secured loans that must be repaid when either party refinances or sells their home.

Under New York state law, a judgment lien can be “stripped,” meaning removed as a lien against the property and reduced to an unsecured loan, only if the first and/or second mortgages are on the home. exceed the value. Additionally, under New York state law, the “homestead exemption” of $50,000 per spouse takes priority over a judgment lien. Therefore, a judgment lien will be “discharged” if the first and/or second mortgages, as well as the homestead exemption, exceed the value of the real estate.

To remove a judgment lien, a motion must be brought in the county courthouse in which the judgment is filed and the real estate is located.

In today’s real estate crisis, many homes are “underwater”. This means that the value of the home is less than the value of the first or second mortgage.

In bankruptcy court, it is fairly common to strip the judgment lien when the value of the real estate is unsecured. A judgment in bankruptcy court removing the lien means the debt has turned into unsecured debt, which is either completely discharged in Chapter 7 bankruptcy, or paid on the dollar for pennies under Chapter 13 bankruptcy. Is.

A second or third mortgage may also be foreclosed in bankruptcy proceedings if the amount of the second or third mortgage is “wholly unsecured” by the real property. Bankruptcy law in New York provides that, as long as a mortgage is 100% secured by real estate, then it can be stripped into an unsecured loan. This means that if the value of your client’s mortgage, plus the homestead exemption of $50,000 per spouse, exceeds the value of the real estate, the second or third mortgage will be removed in a Chapter 13 bankruptcy.

Until recently, a bankruptcy party was not allowed to foreclose on a second or third mortgage under Chapter 7 bankruptcy. However, a recent case decided by Judge Eisenberg in the Eastern District of New York (Long Island) holds that a fully unsecured second mortgage can be stripped in a Chapter 7 bankruptcy.

However, if a second or third mortgage or judgment lien is securing even one percent of the value of the real estate, it cannot be left in the unsecured loan.

Bankruptcy Court judges in Westchester and Hudson Valley (Southern District of New York) have not yet decided whether they will follow Judge Eisenberg in eliminating unsecured mortgages entirely in Chapter 7 cases. In fact, two bankruptcy court appeals cases have ruled against removing liens in Chapter 7 cases.

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