A couple of months back I was in line on ‘Chapter 13 Day’ waiting to talk to the Trustee with all the other counsel. While waiting we got to discussing ‘shop’. The topic of stripping 2nd mortgage liens came up and the consensus was that while the law had allowed it for years in the District of Maryland, it has only been in the couple of last years or so that we have had the facts to really make use of the provision. “Stripping” is a term used to describe judicially voiding a lien (security interest). In this discussion it refers to a second mortgage lien on real property, but it can refer to other types of security interests.
The key facts necessary to strip the 2nd mortgage lien is that the balance on the first mortgage has to be greater than the value of the property. With falling real estate values, this is now frequently the case. This can only be done in a Chapter 13 wage earning reorganization case. One issue is that the lien stripping is only effective upon the completion of the Chapter 13 Plan and the entry of a discharge order in favor of the debtor.
The motion to strip the lien should be filed at the outset of the case. The motion is filed under §506 of the Bankruptcy Code. Local Rule 3012-1 and Local Rule 3012-2 for the U.S. Bankruptcy Court for the District of Maryland govern the procedure and there is also in Appendix A of the Local Rules a form for the motion (Local Bankruptcy Form G).
One issue that I see arising in the years to come in that the new prevalence of these motions to strip liens will lead to title problems in the years to come. Most title companies and real estate practices are not all that informed about bankruptcy practice. There is no requirement that the order granting the stripping of the lien be recorded in the land records of the county where the property is situated. My practice is to put recording information for the lien being stripped in the Order the Bankruptcy Court signs. The idea is to make it possible to record certified copies of the two orders (Lien Stripping Order and Discharge Order) side by side in the local land records and have it indexed against the property so that a future title search will not show an unreleased mortgage that will cause marketability problems.
September 10, 2010