A long-awaited decision was issued last week by the 8th Circuit Court of Appeals, dismissing a chapter 13 trustee’s appeal of a decision by the 8th Circuit Bankruptcy Appellate Panel, which had noted that the concept of lien stripping is noncontroversial and has been approved by all circuit appellate courts which had ruled on the issue.
“Lien stripping” means removal of second mortgage liens in chapter 13 repayment plans, which can be done as long as the value of the homestead is less than the balance owed on the first mortgage. It cannot be done in chapter 7, but some debtors will file chapter 13 after chapter 7 to strip the liens, a concept known as the mythical chapter 20.
While lien stripping has been overwhelmingly approved across the country, Minnesota courts have been slow to embrace it. The recent decision was anticlimactic in that it did not clarify the status of lien stripping in Minnesota, but suffice it to say that in my opinion the chances of lien stripping being effective have increased from 99% to 99.9%. The appeal was simply dismissed on procedural grounds, because the intermediate court had “remanded” the case back to the lower court, meaning the case had to move down the appellate ladder before moving its way back up.
I have been a leader in the area of stripping junior liens for consumer debtors. I will be on an expert panel at the Bankruptcy Institute in October to discuss these recent developments, and have addressed my colleagues on this issue in previous Continuing Legal Education classes as well. If you have questions about this topic, please contact me.