Under a Chapter 13 bankruptcy, a debtor reorganizes his or her debt and has a set period of time to make payments, generally three to five years. This reorganization may provide relief to a debtor, and possibly avoid a home foreclosure in certain circumstances. In fact, if a home has more than one mortgage, and the value of the home is less than the value of the first mortgage, it may even be possible to "strip off" a second mortgage entirely.
The recent United States Court of Appeals for the Third Circuit case of In re Rodriguez not only discussed the concept of "stripping" a second mortgage, but also demonstrated how complete and absolute a confirmed plan of repayment can be, protecting the debtor even in unusual circumstances.
A second mortgage . . . and a hearing missed
The debtors filed for a Chapter 13 bankruptcy, which through the proceedings resulted in the creation of a Chapter 13 plan. As part of this plan, the debtors wished to "strip off" the second mortgage on their home.
The bank holding the second mortgage objected to the plan because the debtors' residence was worth more than the value of the first mortgage. As part of the objection, the bank requested a hearing on the matter.
However, the bank failed to appear at the hearing, and, in addition, claimed that a "computer glitch" had kept the bankruptcy trustee-the individual tasked with administering the bankruptcy-from knowing about the bank's objection. Thus, at the confirmation hearing, the debtor's plan was confirmed and the second bank's mortgage was stripped off.
The bank filed a motion seeking relief from the confirmed plan, on the basis of excusable neglect.
The debt discharge was absolute
The Third Circuit Court of Appeals held that the bank's attempt to revisit the proceedings would disturb the confirmation order to an impermissible extent under the federal bankruptcy laws.
The purpose of bankruptcy law and the reorganization of a debtors obligations could not be accomplished if the discharge of debtors through bankruptcy was not complete and absolute. In such a case, the very policy of the law would be defeated.
The bank should have raised its challenge at the confirmation hearing, and having not raised its objection until after the repayment plan was confirmed, the "stripping off" of the second mortgage would stand.
While the specific circumstances of this case may have been unusual, it is very common for a homeowner to find relief through a Chapter 13 bankruptcy. Typically, lien stripping of a mortgage occurs when the underlying home's value does not cover the claim of the first mortgage. But even if "stripping" is not an option, a foreclosure might still be stopped and a repayment plan put in place. If you are considering a bankruptcy, consult with an experienced bankruptcy attorney who can review your individual situation and guide you through the entire process.