One of the most powerful laws used by debtors in Chapter 13 bankruptcy cases is the ability to avoid or “strip off” wholly unsecured second or third liens on their personal residences. For example, where spouses own a home worth $200,000, with a first mortgage of $250,000 and a second mortgage of $75,000, they can strip off the second mortgage lien and treat the debt as unsecured because the second lien has no value. By stripping the second lien, debtors can emerge from bankruptcy with only their first mortgage lien left on the property and gain the fresh start that Congress intended.
In order to take advantage of this law, the Fourth Circuit has recently held in the case of Alvarez v. HSBC Bank USA, NA, 2013 WL 5737704 (4th Cir. 10/23/13), that both spouses on title to the property must also be debtors in bankruptcy. As long as title to the property is held by both spouses as tenants by the entirety, the court ruled that an individual spouse could not avoid a wholly unsecured lien against property that was jointly owned by the debtor and the non-filing spouse.
The court reasoned that where only one spouse files for bankruptcy, only the interests of the spouse who actually filed for bankruptcy are before the court and are part of the bankruptcy estate. The only asset which becomes part of the estate is the debtor’s interest as it existed immediately before the case was filed, which would be his or her individual interest as a tenant by the entirety. As a result, both spouses must file Chapter 13 bankruptcy together in order to avoid valueless liens on property that they own together as tenants by the entirety.
This can make filing for Chapter 13 bankruptcy a challenging decision for couples who own property together. Questions may arise that require sophisticated analysis. For instance, should both spouses file if one of them has excellent credit? If they decide only one spouse will file, do they understand he or she is not getting the full fresh start that he or she would be entitled to if both were to file as all the liens on the property will remain after the case is completed? Would a short sale or a surrender of the property make more financial sense? For guidance in answering these questions, you should talk to an experienced bankruptcy attorney.
The offices of Laura Margulies & Associates, LLC has assisted thousands of clients through the Chapter 13 bankruptcy process, including the process of stripping liens in complex situations. Please call us for a consultation today. Laura J. Margulies is a principal and Fred Nix is an associate in the firm of Laura Margulies & Associates, LLC. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia. To learn more about our firm visit our web site at www.law-margulies.com