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  1. #1
    Join Date
    Feb 2015
    Posts
    7

    Default Does a HELOC Lender Have to Release a Lien After Chapter 7 Bankruptcy

    My question involves real estate located in the State of: Michigan

    Short version: My primary (only) home was foreclosed on by the primary lender in 2015 and sold at Sheriff sale. The 2nd lender (HELOC) did not participate (to my knowledge) in the process. While the foreclosure was in process, I filed a Chapter 7 bankruptcy, which listed both lenders with liens on the property. Now, 2 years later, I'm attempting to sell the home, and learned that the 2nd lender did not release their lien on the title. Upon contacting them, they're claiming the loan survives the chapter 7.

    I have a call to my attorney, but with closing scheduled tomorrow morning, I'm curious what others think about this. It was my understanding (I could be wrong) that the 2nd lender lost their interest in the property at the sheriff sale. whether or not that is correct, shouldn't the chapter 7 discharge include this debt?

    I'm hoping the person at the bank is simply mistaken on the process, but hoping some folks here can help me better understand/make my case. Time is of the essence!

    Thank you!!!

  2. #2
    Join Date
    Oct 2016
    Posts
    4,301

    Default Re: Foreclosure, Bankruptcy, Redemption, HELOC

    You asked this question at 4:23 CST for a closing scheduled for tomorrow? It may be scheduled but I don't think it is going to happen even if the person you spoke to was mistaken.

  3. #3
    Join Date
    Sep 2010
    Posts
    19,901

    Default Re: Foreclosure, Bankruptcy, Redemption, HELOC

    Bankruptcy does NOT automatically strip liens. Sometimes in the case of a bankruptcy where the property has no equity to cover even the first mortgage, the judge will strip the junior leins (this is more to protect the first lienholder than the debtor). If that didn't happen, the liens remain (and they would if there was equity beyond the first lien).

    However, something doesn't make sense. If your property was foreclosed upon by the first mortgage and sold at the sheriff's sale, the junior liens will be extinguished. However, if that had happened, you have no ownership rights to be selling.

  4. #4
    Join Date
    Sep 2005
    Location
    Behind a Desk
    Posts
    98,846

    Default Re: Foreclosure, Bankruptcy, Redemption, HELOC

    Quote Quoting flyingron
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    Sometimes in the case of a bankruptcy where the property has no equity to cover even the first mortgage, the judge will strip the junior leins (this is more to protect the first lienholder than the debtor). If that didn't happen, the liens remain (and they would if there was equity beyond the first lien).
    The only circuity that I'm aware of that allows the stripping of a wholly unsecured lien in a Chapter 7 bankruptcy is the 11th Circuit (Florida, Georgia, Alabama). If the court stripped a lien, that will be reflected in the orders from the bankruptcy case. If not, the lien remains in effect.

    There's an unpublished case (non-precedential) that indicates that a junior lienholder's rights are not extinguished when the borrower redeems the property; although the foreclosing lienholder's claims are satisfied by the redemption. See Keybank Nat'l Assoc. v. Ameriquest Mortgage Co., 2004 WL 1057814 (Mich. App. May 11, 2004).

  5. #5
    Join Date
    Sep 2010
    Posts
    478

    Default Re: Foreclosure, Bankruptcy, Redemption, HELOC

    1. There is no lien stripping in Chapter 7. Period. See the 2015 USSC decision in Bank of America v. Caulkett.

    2. I highly doubt that a borrower's ability under state law to redeem property out of a judicial foreclosure extinguishes the second lien.

    3. Assuming OP is using a title company the preliminary title report done long before the scheduled closing date would have told OP that the second lien needed to be released (paid).

    4. Closing is not going to happen unless all liens and encumbrances are paid or, OP is doing this deal with the buyer taking the property subject to such liens.

    This entire thread is suspect.

    Des.

  6. #6
    Join Date
    Jan 2006
    Posts
    38,867

    Default Re: Foreclosure, Bankruptcy, Redemption, HELOC

    Quote Quoting despritfreya
    View Post
    1. There is no lien stripping in Chapter 7. Period. See the 2015 USSC decision in Bank of America v. Caulkett.

    2. I highly doubt that a borrower's ability under state law to redeem property out of a judicial foreclosure extinguishes the second lien.

    3. Assuming OP is using a title company the preliminary title report done long before the scheduled closing date would have told OP that the second lien needed to be released (paid).

    4. Closing is not going to happen unless all liens and encumbrances are paid or, OP is doing this deal with the buyer taking the property subject to such liens.

    This entire thread is suspect.

    Des.
    The 2nd is extinguished upon the sheriffs sale. I have found nothing that suggests the lien is or even can be reasserted once the sale takes place. If true then at least that part of the story seems plausible.

  7. #7
    Join Date
    Nov 2013
    Posts
    7,056

    Default Re: Foreclosure, Bankruptcy, Redemption, HELOC

    I think the second lender lost their interest in the Sherriff sale. They could have bid and taken the property. But flyingron makes a good point.

  8. #8
    Join Date
    Feb 2015
    Posts
    7

    Default Re: Foreclosure, Bankruptcy, Redemption, HELOC

    Thanks to all of you so far for the replies. Here's a couple responses to your comments.

    Unfortunately I was just made aware of the problem so I started doing some research to try and avoid delaying the closing. Sounds like I can proceed with the closing by putting the balance in escrow, but still need to figure out if I'm on the hook for this or not.

    Once the home was sold at the sheriff sale, I was allowed to "redeem" the property. Called a redemption in most of the reading I've done. In Michigan (and some other states) the owner of the property has the right to buy back the property for the price it was sold at auction, plus some fees and taxes. In my case, that price was $60k less than the original loan amount, which made this a pretty nice option. This is VERY uncommon however, so information is limited and there's a LOT of confusion amongst the mortgage, title, and real estate professionals I've dealt with since.

    Thanks again, and please share any other thoughts you may have. All very helpful.

    After reading the above responses again, I guess the answer is in the details of the sheriff sale. Since I "redeemed" the property, I'm not sure if that was part of the sheriff sale, or if that negates the sheriff sale. Anybody with experience redeeming a property after the sheriff sale?

  9. #9
    Join Date
    Oct 2014
    Posts
    8,238

    Default Re: Foreclosure, Bankruptcy, Redemption, HELOC

    Quote Quoting Douger77
    View Post
    My question involves real estate located in the State of: Michigan

    Short version: My primary (only) home was foreclosed on by the primary lender in 2015 and sold at Sheriff sale. The 2nd lender (HELOC) did not participate (to my knowledge) in the process. While the foreclosure was in process, I filed a Chapter 7 bankruptcy, which listed both lenders with liens on the property. Now, 2 years later, I'm attempting to sell the home, and learned that the 2nd lender did not release their lien on the title. Upon contacting them, they're claiming the loan survives the chapter 7.

    I have a call to my attorney, but with closing scheduled tomorrow morning, I'm curious what others think about this. It was my understanding (I could be wrong) that the 2nd lender lost their interest in the property at the sheriff sale. whether or not that is correct, shouldn't the chapter 7 discharge include this debt?

    I'm hoping the person at the bank is simply mistaken on the process, but hoping some folks here can help me better understand/make my case. Time is of the essence!

    Thank you!!!
    If the home was sold at sheriff sale, how is it that you got the property back?

    Note that in the bankruptcy, your personal liability for debts is discharged, but liens that attach to property generally survive. Thus, the creditor could not sue you on the debt post-discharge but it may still foreclose its lien on the property to which the lien attached prior to filing the bankruptcy petition.

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