Can a Spouse Strip a Joint Junior Mortgage in an Individual Chapter 13 Plan?

One of the benefits to some individuals in filing for Chapter 13 is the possibility of "stripping" or removing a second mortgage lien from the property through the completion of their Chapter 13 Plan.

Typically, such cases are filed as adversary proceedings (at least in the Eastern District of Michigan), which essentially is a lawsuit in the bankruptcy proceedings, by the property owners against the mortgage company. The process by which this occurs is, in and of itself, a whole topic to be covered in a later blog post.  The issue is, however, whether an individual spouse strip a joint lien when the other spouse has not filed bankruptcy. It would appear, that at least in the Eastern District of Michigan, the answer is "yes."

For purposes of this discussion, lets assume that Client A is married.  She and her husband have two mortgages on the property that they own as tenants in the entirety. The value of the house and the amount due on each mortgage indicate that this case is ripe for a lien strip proceeding in a Chapter 13 petition. Does the spouse (who is still on the mortgage and note) have to file Chapter 13 as well in order to get the lien strip?

In most jurisdictions, the answer would be "no."Several courts have held that a non-filing individual is not allowed to reap the benefits of bankruptcy without paying the costs of bankruptcy.  In re Hunter, 284 B.R. 861, (Bkrtcy E.D.Va 2002). Others have held that to allow a lien strip to occur where one of the legally responsible parties has not filed bankruptcy is a violation of the mortgage lien holder's due process rights. In re Erdmann, 446 B.R. 861 (Bkrtcy N.D.Ill 2011).

In In re Strasborough, 426 B.R. 243, Bkrtcy E.D.Mich 2010), the Eastern District of Michigan was presented with the question of whether an individual can strip off a second mortgage in a Chapter 13 Plan, even if her jointly liable, non-filing spouse was not a party to the action. Judge Steven Rhodes held that debtors acting alone and with no participation by non-debtor spouses, could avoid junior mortgage liens on homestead property that is held by tenants in the entirety. Judge Rhodes rejected the analysis set forth by In re Hunter by looking at Congressional intent: Did Congress intent to allow the avoidance of a junior lien on entireties property when only one spouse files? Since the language of the statute is silent on the issue, Judge Rhodes held that the avoidance of junior lien on entireties property is consistent with entireties law.

Strasborough thus allows, Michigan, one spouse to file Chapter 13 and allow a spouse that is a joint mortgage holder to not file, and still allow a lien strip to occur.