Bankruptcy

Individual Chapter 13, Court Allows Joint Second Mortgage Lien Strip

By Kurt O'Keefe, Attorney at Law

A second mortgage lien in the wife’s individual Chapter 13 bankruptcy case has been stripped by a Court, even though the mortgage and lien were in the name of the wife and her non-filing husband.

Eastern District of Michigan bankruptcy Judge Rhodes wrote the opinion, stripping  second mortgage liens, finding the debts totally unsecured, designated for publication, on two consolidated cases.

In each case, it was agreed that the home was underwater, that is, worth less than the amount owed on the first mortgage.

And, there was a second mortgage in each case.

Although the non-filing spouse in each case had filed a prior Chapter 7, and discharged any personal liability on each mortgage, the Court said that did not matter in its opinion.

As with most Michigan houses with a mortgage, the homes had no equity.

As with many Michigan homes, the value of the house did not even cover the amount owed on the first mortgage.

Though bankruptcy courts are powerless to modify the terms of a first mortgage securing the debtor’s principal residence, or home, even in Chapter 13 cases, for some years now, it has not been uncommon for debtors to get rid of the second mortgage lien.

That is, if they complete all their Chapter 13 payments and get a discharge.

Debtors must also file an adversary proceeding, suing the second mortgage company, and proving that the second mortgage lien is unsecured.

Judge Rhodes’ opinion came in two such adversary proceedings.

11 USC 506 states that a claim is secured only up the the value of the collateral securing the lien.

So, one debtor’s house was worth 120,000, with a first mortgage of 131,117.98, and a second mortgage of 48,262.48.

The other was worth 100,000, with a first mortgage of 103,990.24 and a second of 45,598.48.

Nothing new so far.

The second mortgage holders claimed that, because the homes were owned as tenants by the entireties, by the filing debtor and the non-filing spouse, their second mortgage lien could not be stripped in an adversary proceeding brought by only one of the married couple.

The court carefully analyzed the facts and precedent, finding that there being no equity in the property, the bankruptcy estate had no interest in that property.

Many cases establish that the bankruptcy estate includes whatever entireties property is available to pay off joint claims, that is, claims against both spouses.

However, Judge Rhodes concluded that both spouses do not have to be in the bankruptcy or adversary case, even though the non-filing husband or wife benefits from the lien strip, it is just like benefiting from a run of the mill chapter 13 bankruptcy case, in which one spouse can file and stop a foreclosure.

It is not know at this time if either creditor will appeal.

Individual Chapter 13, Court Allows Joint Second Mortgage Lien Strip

Full post as published by Bankruptcy Law Network on March 27, 2010 (boomark / email).