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.

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.

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.

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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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What is a Notice of Dismissal of Bankruptcy?


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What If My Cosigner Files Bankruptcy?

If your debts have become unmanageable, you have the option of filing for bankruptcy protection. In a Chapter 7 bankruptcy, you surrender non-exempt assets to a court-appointed trustee who uses them to repay your creditors. In a Chapter 13, the trustee administers a repayment plan under which you pay a percentage of your debts. At the end of your bankruptcy, the court discharges or cancels all debts that can legally be discharged. If you have cosigned a loan and your cosignor files for either Chapter 7 or Chapter 13, you may still be responsible for repayment of the loan in full.

Chapter 7 Relief of Stay

In a Chapter 7 bankruptcy, a debtor petitions the court for protection from lawsuits and collection efforts. As soon as the petition is filed, the court grants an automatic stay. This is a legal restraining order that goes out to all creditors whom the debtor has listed on the petition. The stay has the effect of immediately suspending collection actions, and preventing any new actions while the bankruptcy is in progress. Creditors may request relief from the stay, which the court will grant if it has grounds to do so.

Bankruptcy Laws Regarding Mortgage

Bankruptcy allows debtors to get some relief from a debt load they cannot otherwise overcome, but it doesn't always allow them to keep their assets. Mortgage lenders have rights even while the homeowner is going through bankruptcy. Depending on the type of bankruptcy a debtor files and how much equity he has in his home, he may lose his home during the bankruptcy process.

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