Junior Liens in Borrower Bankruptcy?

#1 · February 23, 2024, 9:17 am

Are Junior liens eligible to be deleted if the borrower files for bankruptcy?

Thanks in advance!

#2 · February 23, 2024, 9:22 am

Hi Caprese!

If the junior lien is “wholly unsecured” then it can be wiped in bankruptcy through a motion to strip.

If a bankruptcy is filed (you'll find it by searching the borrower's SSN# in PACER), check the Voluntary Petition Schedule D (secured claims) to determine if there is equity above the senior lien to protect the junior.

Then check the rest of the "History & Documents" to confirm that no Motion to Strip for the subject lien has been approved. Then, see if the plan has been approved and completed - if not, there is still hope that the plan will be rejected or the BK will fail and the lien will still be secured.

More comprehensive training is available in the Bankruptcy Module of the Advanced Due Diligence course (part of the Foundation Series for Note Investor Network members).

#3 · August 22, 2024, 1:57 pm

Quote from Bill on August 22, 2024, 1:57 pm
In a Chapter 13 BK if the borrower files a motion to strip the junior lien based on no equity in the property, above the senior lien, covering the junior lien. The BK Court will have a hearing on it. They need to prove it, with an appraisal, BPO, etc. The junior can contest the motion to strip the junior lien. The junior lien has a right to get their own appraisal, BPO, etc., if they feel that there is equity in the property, above the senior lien, covering the junior lien. The BK Court will then decide at the hearing on the information both parties supplied. If the BK Court resides with the borrower, and grants the motion to strip the junior lien. The borrower still needs to complete their Chapter 13 BK Payment Plan. Chapter 13 BK Payment Plans are usually 36 months, 48 months or 60 months. If the borrower doesn't complete their Chapter 13 BK Payment Plan, and gets dismissed from the Chapter 13 BK, the motion to strip the junior lien, isn't granted. Meaning that the junior lien is still valid, and the strip doesn't happen.

Some things to keep in mind with Chapter 13 BK, and the motion to strip the junior lien:

The BK Court has the right to determine that there is some equity in the property, above the senior lien, covering the junior lien. This is called a cram down. An example is, let say that the junior lien balance is $80K, and the information provided to the BK Courts show that there is $40k of equity in the property, above the senior lien, covering the junior lien. The BK Court would cram down the junior lien balance to $40k, and the borrower would be responsible to pay that $40k through the Chapter 13 BK Payment Plan.

I've also seen this happen before in Chapter 13 BK with higher value properties, when the borrowers have solid financials and the junior lien is a higher loan balance. The motion to strip the junior lien was filed, and there is no equity in the property, above the senior lien, covering the junior lien. The junior lien becomes the unsecured creditor, with the most debt owed to, by the borrower. Over the course of the Chapter 13 BK Payment Plan, the junior lien holder, as an unsecured creditor will receive monthly payments. I personally have had 3 junior liens that the motion to strip the junior lien was filed, and there was no equity in the property, above the senior lien, covering the junior lien. I received over $60k of unsecured payments on each loan. My cost basis on these 3 loans where between $20k to $35K, so I still made a profit on these 3 loans as an unsecured creditor.

In a Chapter 13 BK if the borrower files a motion to strip the junior lien based on no equity in the property, above the senior lien, covering the junior lien. The BK Court will have a hearing on it. They need to prove it, with an appraisal, BPO, etc. The junior can contest the motion to strip the junior lien. The junior lien has a right to get their own appraisal, BPO, etc., if they feel that there is equity in the property, above the senior lien, covering the junior lien. The BK Court will then decide at the hearing on the information both parties supplied. If the BK Court resides with the borrower, and grants the motion to strip the junior lien. The borrower still needs to complete their Chapter 13 BK Payment Plan. Chapter 13 BK Payment Plans are usually 36 months, 48 months or 60 months. If the borrower doesn't complete their Chapter 13 BK Payment Plan, and gets dismissed from the Chapter 13 BK, the motion to strip the junior lien, isn't granted. Meaning that the junior lien is still valid, and the strip doesn't happen.

Some things to keep in mind with Chapter 13 BK, and the motion to strip the junior lien:

The BK Court has the right to determine that there is some equity in the property, above the senior lien, covering the junior lien. This is called a cram down. An example is, let say that the junior lien balance is $80K, and the information provided to the BK Courts show that there is $40k of equity in the property, above the senior lien, covering the junior lien. The BK Court would cram down the junior lien balance to $40k, and the borrower would be responsible to pay that $40k through the Chapter 13 BK Payment Plan.
I've also seen this happen before in Chapter 13 BK with higher value properties, when the borrowers have solid financials and the junior lien is a higher loan balance. The motion to strip the junior lien was filed, and there is no equity in the property, above the senior lien, covering the junior lien. The junior lien becomes the unsecured creditor, with the most debt owed to, by the borrower. Over the course of the Chapter 13 BK Payment Plan, the junior lien holder, as an unsecured creditor will receive monthly payments. I personally have had 3 junior liens that the motion to strip the junior lien was filed, and there was no equity in the property, above the senior lien, covering the junior lien. I received over $60k of unsecured payments on each loan. My cost basis on these 3 loans where between $20k to $35K, so I still made a profit on these 3 loans as an unsecured creditor.