What Happens to Your HELOC In Chapter 7 Bankruptcy and What is Lien Stripping?

We have been asked this question many times, and this time we like to address this issue in greater details. Let us say you own a home, and if you file for either Chapter 7 or Chapter 13 bankruptcy, what happens to second or third mortgages and liens on your home? This is a very pertinent question as this relate to short sale also. Banks usually approves short sale if there is only loan attached with the collateral i.e house. However, they are reluctant to do short sale if there is home line of equity (HELOC) attached with the property. Banks just cannot foreclose the home unless the join the junion lien interest holder, the second lender. Let us say you own a home and the principal mortgage is $250,000 but you have a second loan and where you own another $100,000. You may have some equity but that may only belongs to the principal mortgage holder. Now, let us see if you file bankruptcy what happens to both of them.

In Nevada, the first principal mortgage is exempted or protected up to the value of $550,000 which is the homestead value. Let us put in other words. Your home is protected up to the value of $550,000 and no lien can take away this much value because it is provided under the Nevada Revised Statutes. Even if you file chapter 7 bankruptcy, this much value is exempted from your creditors. It is advisable to file homestead in Nevada. It does not cost much, probably less than $20 dollar, if you do it yourself. Again, in Chapter 7 bankruptcy, your bankruptcy discharge will eliminate your personal liability on the second mortgage but will not eliminate the lien. In Chapter 13 bankruptcy, you can eliminate both your personal liability and the lien in a procedure called lien stripping. The basic lien stripping rule is: You can eliminate a lien that has no security in the home, but you can’t eliminate the lien if part of it is secured by the home’s value.

Here’s an example. Say your home is worth $210,000, your first mortgage is $205,000, and your second mortgage is $25,000. You can’t strip off the second lien because it is secured by at least $5,000 of your home’s value.

What if a Lien Remains on Your Home After Chapter 7 Bankruptcy?
There is no lien stripping in a Chapter 7 bankruptcy, the lien may have very little effect on your future financial affairs. As we stated, the Chapter 7 bankruptcy will discharge your personal liability for the second mortgage (meaning you can’t be sued for money owed on it). And, absent value in the house securing the second mortgage, the holder wouldn’t benefit from a foreclosure (since all the value of the home would go to the first mortgage holder in a foreclosure sale). Simply speaking, in case of foreclosure the proceeds of the sale would be distributed according to the set of priority rules, and under that the first set of proceeds would go to the principal mortgagor. As we know, there is little or no equity left in our homes these days, so in nutshell, little would be trickled to the second lien holder.

This means there won’t be negative result from the lien remaining on the home after your bankruptcy — unless of course your home’s value comes back to a point that would allow you to sell the home or support a foreclosure action by the second mortgage lender. This is clearly less likely when your home is way underwater (50% is common) than when you are just a tad underwater.

In some cases it needn’t be one choice or the other. It used to be that you could file a Chapter 7 bankruptcy, discharge your personal liabilities and then immediately file a Chapter 13 bankruptcy to strip off the lien. This was called a “Chapter 20” bankruptcy. Now it’s not quite that simple. You are still entitled to file a Chapter 13 bankruptcy right after your Chapter 7 discharge but you won’t qualify for a Chapter 13 discharge. Again, you need to file Chapter 13 in good faith and only if you qualify and submit a realistic plan.



  1. This is interesting. I did a Chap 7 and it is discharged. I am in a foreclsoure battle with Deutsche on a loan it APPEARS that Chase sold them in an MBS. However, the deed etc is not in Deutsches name as it should be. This was done even though I was current on the modification trial payments.Now it appears that Chase sold the second to Five Lakes at some point in time. But now that the BK is over, 5 Lakes calls and wants to know what we are going to do, even though there is a foreclosure in process in which Deutsche is sueing Chase on the second also. It seems likely that Chase sold the note to 5 Lakes prior to the BK, but did not disclose, so it was not on the BK. So it seems that 5 Lakes is pursueing an unsecured debt that is cleared thru BK. My attorney is looking into it, but it seems weird.

    Anyone else have anything like this?

    • Here is one big problem you may potentially face. It is called judicial estoppel. If your chapter 7 is discharged, the important question is if you preserve your legal claim in your chapter 7 assets proceedings? If not, the opposing counsel say, it has been judicially estopped. This possibly be a big complex for you to understand because it is legal stuff. Again, it is complex question to discuss in “comments”. I suggest, if you are serious about legal matters, hire a licensed and qualified attorney in your jurisdiction.

  2. Thanks, but I do have an attorney. We have also filed counter claims against Deutsche for fraudulent foreclosure and will also file counter claims against Chase. Now that we see this Five Lakes thing, my guess is we will include them. At this point, they now say they are a SERVICER for Chase, instead of Chase selling the second to them. So we really do not know the facts yet. However, they can do nothing at this point anyway. Also the house value is less than the first, so there is no way they can claim equity and we do not plan on selling or short selling. As part of the counter claims we have file a quiet title action which should also clear up the deal. Only time will tell.

  3. I have a question that I pray someone can answer. I filed chap 7 in 09in SOCAL and it was discharged in 09. Included was primary lender (chase) and Heloc (poplar mtg). Primary lender has not foreclosed on property after three years and stated that they won’t because husband is in the service SCRA. Said that they will not foreclose until a YEAR after his ETS date (date he exits the millitary) That is in 6 years! I was going to apply for a short sale through Chase to get this all over with but totally wasn’t thinking about the Heloc. After reading I see that I won’t be able to short sale unless heloc lender agrees (which won’t be without cash) So is there any choice that I have in the matter than waiting 6 years for primary lender to foreclose? Can they foreclose with there being a heloc? Can I rent the property out for 6 years then? I have already take a big hit from the bankruptcy and have alread established good credit. What is going to happen after 6 years when the home does foreclose? PLEASE HELP
    Primary loan 179k, Heloc 60k fair market value on home 120k

    Thank you so much for your time and information that you have put out.

    • Yes, they can foreclose with HELOC, but they have to join them, or at least nominally join them. Well, I assume you are occupying this property and not paying any mortgage payment. So you are ahead of the game anyway. You can join HELOC in short sale. At the most, they would ask you to pay a small contribution which can always be negotiated to a smaller amount. Because you filed bankruptcy, so they are not entitled to ask any money as this would be a violation of the Bankruptcy Code. You could have rented the property but probably for a smaller rent as to make tempting for tenant to stay. Once tenant knows, they move out. I don’t think you should worry about anything. As long as you had surrendered these loans, they have become part of the discharge. The question is was your husband in the discharge. If not, they lender can come after him. The SCRA can only stay for sometime. As usual, ask someone lincensed in your jurisdiction.

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