08 Feb Stripping Off Your 2nd Mortgage in a Minnesota Chapter 13 Bankruptcy
The issue of whether a fully unsecured second (2nd) mortgage can be stripped through the filing of a Chapter 13 bankruptcy is closer to being settled law. The 8th Circuit B.A.P. reversed the Minnesota Bankruptcy Court and held that fully unsecured home equity loans may be stripped off.
In re Fisette the Appellate Panel held that liens may be removed by the successful completion of a Chapter 13 bankruptcy case in Minnesota. Prior to the ruling Minnesota was in the minority of states where lien stripping of second mortgages were not allowed.
In Fisette the debtor had filed a chapter 7 bankruptcy and received a discharge of unsecured debts. Immediately after receiving the discharge the debtor filed a chapter 13 bankruptcy with language included to strip the 2nd mortgage. The judge in the case rejected the lien strip and refused to confirm the plan. An appeal was filed with the B.A.P, which reviewed the fact that the debt that made up the lien was fully unsecured. The court noted that the plain language of section 1322 does not prohibit modification of the rights of wholly unsecured lien holders, including stripping off liens.
If you have a home with a 2nd mortgage which is fully unsecured, i.e. the house is worth less that even the 1st mortgage, you should consider a bankruptcy to strip the 2nd lien off the house. While the house will still be underwater, at least you will be closer to even. A chapter 13 filing, when successfully completed will also satisfy credit card debt, personal loans, automobile deficiencies and health care debt.