Can a Bankruptcy Judge Void a Mortgage?

By Cindy Hill

Under some circumstances, a bankruptcy court may not only delay or stop a foreclosure process, but actually declare a mortgage to be void, relieving the debtor of the obligation to continue making any mortgage payments. Bankruptcy courts can eliminate or reduce the amount you own on second mortgages in some bankruptcies through a process called lien stripping, and void a first mortgage if it has particular types of legal defects.

Under some circumstances, a bankruptcy court may not only delay or stop a foreclosure process, but actually declare a mortgage to be void, relieving the debtor of the obligation to continue making any mortgage payments. Bankruptcy courts can eliminate or reduce the amount you own on second mortgages in some bankruptcies through a process called lien stripping, and void a first mortgage if it has particular types of legal defects.

Mortgage as a Lien

A mortgage is a loan secured by a security interest, or lien, on real property. Many homeowners may have a second mortgage on their home, in addition to their initial or purchase-money mortgage. This second mortgage is subordinate to the first, and the bankruptcy court may consider the second mortgage to be an unsecured loan if the property has a fair market value of less than the amount of that first mortgage. If you do not make your mortgage payments, the lender can seize the security interest in the property and force a sale to pay the remaining mortgage debt. This process, called foreclosure, usually requires court action, but some states allow non-judicial disclosure.

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Chapter 13 Lien Stripping

In a Chapter 13 personal bankruptcy, the debtor can ask the bankruptcy court to convert a secured second or third mortgage into an unsecured debt – which is called lien stripping. Once that conversion takes place and the second mortgage is no longer considered secured debt, that mortgage can be either wholly discharged or partially paid along with other unsecured loans, depending on the details of the Chapter 13 repayment plan in your particular case. Lien stripping is also available for second or third mortgages on investment property. Lien stripping cannot diminish a first mortgage on a home, however, and the process is not available in a personal Chapter 7 liquidation bankruptcy.

Errors on Mortgage Documents

Mortgage documents must contain certain information on their face, including the total debt amount, the interest rate and the maturity date. A bankruptcy court can void a mortgage if this information is not included right up front in mortgage documents. Other defects that can result in a mortgage being voided in bankruptcy court include the lender's failure to get the signature of both spouses where state law required both signatures to place a lien on a marital homestead. A foreclosure and purported mortgage may also be voided by a bankruptcy court if the party bringing the foreclosure action or claiming to hold a mortgage lien cannot prove that it is, in fact, the actual holder of the mortgage interest.

Filing During Stay

Filing bankruptcy gives rise to an automatic stay preventing creditors from pursuing collection actions against the debtor. If a mortgage was not recorded in the land records until the bankruptcy stay was in place, the bankruptcy court may void the mortgage as a violation of that stay. The mortgage lender, like other creditors, is entitled to participate in the bankruptcy meeting of creditors and, in a Chapter 13 bankruptcy, to participate in the development of the repayment plan and object to that plan before the court if necessary.

Other Sanctions

In lieu of, or in addition to, voiding a mortgage, bankruptcy courts may impose a range of sanctions on mortgage lenders who abuse the collection or bankruptcy process. Bankruptcy court judges have issued substantial monetary sanctions and ordered lenders to pay the debtor's attorney fees or costs incurred by having to defend against unsupported claims by purported mortgage lenders.

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Can You Refuse to Reaffirm a Second Mortgage During Bankruptcy?

References

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How to Remove a Lien After Chapter 13 Discharge in Florida

Floridians who wish to hold on to valuable assets, such as the family home, often choose to file for Chapter 13 bankruptcy when they find themselves drowning in debt. They get to keep their property while paying some or all of their debt over an extended period of time. If a property has multiple liens on it, Chapter 13 can even strip these liens from the property. As long as a debtor successfully completes his payment plan, creditors typically release the liens automatically when the bankruptcy is discharged.

Do You Have to Wait for Your House to Foreclose Before Filing Bankruptcy?

Bankruptcy allows debtors to get a fresh start when their bills become overwhelming, but debtors do not have to wait until the bank forecloses before filing for bankruptcy protection. You can file your bankruptcy case at any point in the foreclosure process, and your home mortgage and foreclosure can be handled like your other debts as part of the case.

What Happens if I Can't Make My House Payments in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy can give you a financial clean slate by erasing certain debts and giving you a chance to catch up on your payments. However, your mortgage is generally not one of the debts erased by bankruptcy. If you cannot stay current with all your house payments during your Chapter 13 bankruptcy, your lender can foreclose on your home.

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