When You’re Both on the Mortgage & Deed But Only One of You Wants to File the Chapter 13 …
What Is a Lien Strip?
A lien strip is a process that may be undertaken in a Chapter 13 bankruptcy that allows you to “strip” or remove a second mortgage, home equity line of credit (HELOC) lien, or other sort of lien from your primary residence—if your home is worth less in fair-market value than you owe on a first mortgage. What is actually happening in the Chapter 13 reorganization of your debt on the technical, legalese plane is actually a bifurcation of the debt and reclassification of the unsecured portion as a non-priority unsecured claim. What that really means is that a lien strip is possible if no part of the home’s value is sufficient to “secure” the second mortgage, allowing you to not pay it as a “secured” debt in your Chapter 13 payment plan but as a low-priority unsecured claim, the same as a credit card or medical debt.
In a Chapter 13 bankruptcy payment plan, low-priority unsecured debts are paid whatever is left at the end of the plan after the higher-priority debts are paid (such as the first mortgage), leaving any unpaid balance to be entirely discharged, the same as in a Chapter 7 bankruptcy.
Long story short, you can file a Chapter 13 bankruptcy and get rid of a second mortgage entirely.
But what if your name is not the only one on the mortgage and/or the title to the home? What if your spouse is co-owner of the property but does not want or need to file the bankruptcy along with you?
Can you still strip the lien off in your own, single-filed Chapter 13?
Lien-Stripping with a Non-Filing Spouse: Jurisdiction Rules
This question is one of many bankruptcy-related questions the answer to which is what lawyers call “jurisdictional,” meaning that the answer will change depending upon in which Federal jurisdiction your Chapter 13 is filed.
Although bankruptcy is a Federal legal process that takes place within a Federal bankruptcy court system, that Federal system is broken up into administrative sub-areas: “jurisdictions.” Each jurisdiction’s bankruptcy judges make rulings on questions of law that may not be the same answer given to a similar question by another judge in another jurisdiction. Each bankruptcy judge may be appealed up to that jurisdiction’s Federal court or another bankruptcy appellate panel, and from there to the Federal circuit court of appeals governing an entire group of states.
Detroit, Michigan is within the Eastern District of Michigan federal jurisdiction, subject to the appeals rulings of the Sixth Circuit Court of Appeals (and from there on up to the US Supreme Court).
So What Is the Rule in the Eastern District of Michigan?
Bankruptcy courts are split on the issue of whether a married person who is the joint owner of real estate with their spouse may strip a lien in Chapter 13 bankruptcy without the spouse also filing.
In a case called In Re Strasbourg, an Eastern District of Michigan bankruptcy judge ruled that, when a property is owned as a “tenancy by the entireties” (a form of joint ownership available only to married co-owners under Michigan law), a single-filing debtor may strip a lien even if the spouse is not also filing the Chapter 13 bankruptcy.
With a tenancy by the entirety, the judge reasoned, the entire property sits within the legal “bankruptcy estate” that is created upon the filing of the Chapter 13 bankruptcy case, even if the co-owning spouse is not filing jointly. Whereas other courts in other Federal bankruptcy jurisdiction have not allowed this on the basis that the non-filing spouse should not receive the benefit of the filing spouse’s bankruptcy, our judge in the Eastern District of Michigan was not troubled by that, noting that benefits extend to non-filing parties in bankruptcy “all the time.”
Under Michigan law, a property jointly owned by married persons is presumed to be a tenancy by the entirety unless the title or deed specifically says otherwise.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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