This piece in the San Jose Mercury News is kind of vague about how homeowners are getting rid of second mortgage obligations, so it’s no wonder people are flummuxed about the concept. What it discussed isn’t magic but a technique called lien stripping that we bankruptcy lawyers employ all the time. Unfortunately, despite the fact that bankruptcy is Federal, the effectiveness of a lien strip and steps necessary to carry it out vary from jurisdiction to jurisdiction. But yes this is real; and yes homeowners can walk away from second mortgages that are truly unsecured. Note that lien stripping is not in any way the same as loan modification. Bankruptcy Courts have yet to crack that nut.


Issued: January 20, 2011 by Judge Doyle

Case #: 09 B 46723, 10 A 01292

The Issue: Whether an individual creditor has standing under § 523(a)(4) to bring a direct action against directors of an insolvent corporation for breach of fiduciary duty.

The Story: Debtor owned a plumbing company. Plaintiff claimed that Debtor breached his fiduciary duty to creditors after the plumbing company became insolvent due to the diversion of company funds to pay for the Debtor’s personal debts. Creditor claimed that the debt was non-dischargeable in bankruptcy under Rule 523(a)(4). The court held that the individual creditor lacked standing.

Also a good walk thru on Illinois law about “Special Circumstances Fiduciary Duty.”

Click here to view and download the opinion in .pdf format.