Bankruptcy Tool to Save your Home from Foreclosure

One of the tools I have discussed in this Newsletter before in order to help someone keep their home is the ability to strip a second mortgage from their property and treat it as an unsecured debt.

This can allow someone to keep their home that may otherwise have been severely upside down because of a second mortgage. However, in order to successfully strip a second mortgage, a debtor must show that the balance owed on the first mortgage exceeds the fair market value of the property.

In a case recently decided by Chief United States Bankruptcy Judge, Karen S. Jennemann, of the Orlando Division of the United States Bankruptcy Court for the Middle District of Florida, she addressed the issue of: “Whether a homeowner’s association lien could also be stripped and treated as an unsecured lien?”

First, I must give you a little background with regard to association liens. When someone files for bankruptcy, despite the fact that there is personal liability for a monthly or annual association assessment, upon the filing of bankruptcy and a receipt of a discharge, the debtor is relieved of any personal liability.

However, because a lien still exists on the property, the homeowners association can foreclose on the property to satisfy the outstanding amount owed unless the debtor provides in a Chapter 13 Plan a repayment of that lien over the life of the Plan or pays off the lien after Discharge in a Chapter 7.

In the case before Judge Jennemann, the property was worth approximately $201,000 and the first mortgage had an outstanding principal balance of $354,108. While the Declaration of Covenants for Magnolia Park Homeowners Association provided that the association had a secured lien, like most association documents, the declaration expressly subordinates the association’s lien to the lien of any institutional mortgage.

This is necessary so that individual homeowners can obtain a loan. Therefore, under the circumstances, since the first mortgage far exceeded the fair market value of the property, the court ruled that Magnolia’s lien for assessments was unsecured and, therefore, granted the debtor’s motion to strip the lien.

While this ruling will be disconcerting to my association clients, it will be a tool that may allow some individuals to save their home.

Contact a Bankruptcy Attorney

If you have a situation as we described in this article and have questions or concerns, please don’t hesitate to contact us to answer your bankruptcy legal questions.
Martella Law Firm
18501 Murdock Circle, Suite 304
Port Charlotte, FL 33948
Phone:941-206-3700
Fax:941-206-3701