What’s required to void a mortgage?

Since I was quoted on the front page of the Mercury News on Monday, I’ve been inundated with inquires about how lien stripping in bankruptcy works. So here goes:

1. A voluntary lien, like a deed of trust securing a second loan, line of credit, or HELOC, can be voided only in Chapter 13 or Chapter 11.
2. It can be stripped only if there is no equity in the property after deducting the payoff balances of the liens senior to the lien from the fair market value of the property.
3. The lien is permanently voided only upon the successful completion of the reorganization plan.

Thanks to lobbying by the mortgage lenders nearly twenty years ago, bankruptcy courts are prohibited from compelling any changes to mortgages liens secured only by the debtor’s home.? Stripping junior liens is permitted only when the lien to be stripped is not secured by any value at all in the property that is the collateral.

As a result the help for homeowners that can be provided by a bankruptcy reorganization is ? limited to voiding totally unsecured liens and to eliminating other debts of the homeowners. ? The bankruptcy court cannot require the senior lender to modify a mortgage or to defend its decision to reject a modification.

Legislation passed by the House of Representatives in 2009 would have overturned the prohibition on modifying home loans and allowed judges to reduce mortgage balances to the present value of the home and alter other terms of the loan if the borrower was willing to file bankruptcy and successfully made the plan payments.? The Senate defeated the bill, so bankruptcy judges remain powerless to weigh in on the tug of war between the mortgage bankers and the homeowners.

As always in a down real estate market, you need to determine whether you should keep the house. and what the viability of a modified mortgage is.

You’ve got choices for a house even after you file bankruptcy.

Image courtesy of madnzany