When many Florida residents divorce, they have both senior and junior liens on the marital home for which both parties are legally responsible. If one ex-spouse files for Chapter 13 bankruptcy, he or she might wish to strip the junior lien as part of a debt repayment plan — essentially treating it as an unsecured debt that will be given the same priority as any other unsecured debt. A bankruptcy court on the East Coast recently determined that making this proposal is allowed even when the other ex-spouse, who is not part of the bankruptcy, is still liable for the debt.
Part of what made the issue of the junior lien problematic is that when the ex-wife filed for Chapter 13 bankruptcy on Dec. 15, 2015, she and her ex-husband were both still on the title of the marital home. After that date, the ex-husband transferred his interest in the home to his ex-wife through a quitclaim deed, which made her the sole owner of the home. When she proposed to strip the junior lien, the lender objected, arguing that it was not permissible because the ex-husband was still liable for the debt.
A bankruptcy court sitting in New Jersey determined that once the ex-husband transferred his interest in the home to the filer, 100 percent of the interest in the home became part of the bankruptcy estate. The federal Bankruptcy Code includes all property acquired after the date of filing as being part of the bankruptcy estate. However, the court went on to say that stripping the junior lien is only possible if the value of the home is less than the amount owed to the senior mortgage holder.
Therefore, if a Florida resident files for Chapter 13 bankruptcy without his or her ex-spouse and is the sole owner of the marital home, it might be possible to treat a junior mortgage lien as an unsecured debt in a debt repayment plan. This might be done despite the fact that the other spouse remains legally liable for the debt. In fact, the court went on to suggest that the junior lien would become an unsecured debt for the other spouse as well since that individual is no longer a legal owner of the collateral that was securing the debt.
Source: bna.com, “Lien Can Be Stripped Even Though Non-Debtor Ex Liable for Debt”, Daniel Gill, Sept. 30, 2016