Chapter 18-6 Strip Offs and Strip Downs

18-6 Strip Offs and Strip Downs

18-6:1 A Matter of Equity

"Strip offs" and "strip downs" both arise when the mortgagee is under-secured, meaning the value of the property is less than the amount owed on the mortgage debt. Depending on the jurisdiction, a strip off or strip down can be accomplished through motion, adversary proceeding, or plan treatment where the court makes a finding as to the fair market value of the property.

A "strip off" refers to the removal (or voiding) of a mortgage lien with no equity. Stated differently, a strip off occurs where the court finds the fair market value of the property is less than the amount owed on the first mortgage lien, leaving no equity to support the second mortgage lien, and the bankruptcy court orders a judicial removal of the second lien from the property.⁴³ The junior mortgagee in such a case receives a wholly unsecured claim in the bankruptcy for the amount of the mortgage debt outstanding. A strip off cannot occur in connection with a first priority mortgage because the holder of a first priority mortgage always has equity in the property sufficient to prevent complete removal of the lien.⁴⁴

A "strip down" (also called "cramdown"), on the other hand, refers to a reduction in the amount of the mortgage debt to match the fair market value of the property. In the case of a strip down, any excess in the amount owed on the mortgage over the fair market value of the property would be treated as an unsecured claim in the bankruptcy.⁴⁵ After a successful strip down, the mortgagee has two claims often referred to as a bifurcated claim, in the bankruptcy: one claim which is secured up to the fair market value of the property as determined by the bankruptcy court and a second claim for the difference between the fair market value of the property and the remaining amount of the mortgage debt outstanding. In a case under Chapter 7 of the Bankruptcy Code, the debtor cannot strip off or strip down a lien.⁴⁶ Further, in most cases, where the mortgagor's spouse is a co-owner the property and the spouse is not a debtor in the current bankruptcy case, a mortgagor may not strip off or strip down a mortgage in a case pending under any chapter of the Bankruptcy Code.⁴⁷

18-6:2 Principal Residences

Under Chapter 13 of the Bankruptcy Code, if the property at issue is the mortgagor's principal residence the mortgage cannot be stripped down.⁴⁸ The case law on what constitutes the mortgagor's principal residence is not uniform. For...