Bankruptcy

PROBLEMS WITH LIEN STRIPPING IN A CHAPTER 7 BANKRUPTCY

By Attorney Goldstein

As discussed previously on this blog, Debtors in a Chapter 13 Bankruptcy, have the ability to strip a lien which is not secured by property, where the fair market value is extinguished by a first mortgage. However, the question that must be asked is whether those Debtors who do not have the disposable income to survive a chapter 13 filing, and who otherwise seek a full and complete discharge of all unsecured debt through a chapter 7 bankruptcy can likewise seek a lien strip.There are several ways a Debtor might go about such a process. The most obvious route would be to simply file a chapter 7 bankruptcy and subsequently file an adversary proceeding to strip the second mortgage. The problem with that is no Judge has ever approved such a motion, rather the case law seems to indicate that courts summarily dismiss with prejudice these motions. More specifically, courts have held that lien stripping is not an proper in an adversary proceeding, but rather should be treated through a Chapter 13 Payment Plan. The other method that seems obvious is to simply file a chapter 13 bankruptcy, seek a lien strip and then convert upon relief of said lien to a chapter 7 bankruptcy. The problem is that in many cases, the lien strip had been reversed in these cases.

According to the Bankruptcy Court for the district of Massachusetts, lien stripping does not survive conversion of case from Chapter 13 to Chapter 7, and any lien voided pursuant to Chapter 13 debtor’s ability to strip down liens is deemed revived in event of conversion. Bankr.Code, 11 U.S.C.A. §§ 348(a), 349(b)(1)(C), 506, 1307(a). In re McDonough 166 B.R. 9

Pursuant to 11 U.S.C. § 349(b)(1)(C), in the event of the dismissal of a Chapter 13 case, any lien voided is deemed revived. The same should be true if the case is converted to Chapter 7. Pursuant to § 1307(a), ?[t]he debtor may convert a case under this chapter to a case under Chapter 7 of this title at any time. Any waiver of the right to convert under this subsection is unenforceable.? In the past, the weight of authority held that the satisfaction of an allowed secured claim in a Chapter 13 case survived the conversion of that case to Chapter 7. See In re Hargis, 103 B.R. 912, 915-17 (Bankr.E.D.Tenn.1989); In re Estep, 96 B.R. 87, 89-90 (Bankr.E.D.Ky.1988); In re Tunget, 96 B.R. 89, 89 (Bankr.W.D.Ky.1988). However, the United States Supreme Court held in Dewsnup v. Timm that a Chapter 7 debtor cannot use 11 U.S.C. § 506(d) to avoid a lien to the extent that the creditor?s claim exceeds the value of its collateral. Since the Dewsnup decision, courts have split on the survival of lien stripping after conversion. See In re Pickett, 151 B.R. 471 (Bankr.M.D.Tenn.1992) (secured creditor’s allowed claim was not revived upon conversion to Chapter 7); In re Murry-Hudson, 147 B.R. 960, 962-64 (Bankr.N.D.Cal.1992) (Chapter 13 debtor may hold property free and clear of liens after paying the secured portion of bifurcated lien). But see In re Gammon, 155 B.R. 15, 17-18 (W.D.Okla.1993) (debtor may not redeem collateral in Chapter 7 by payment on lien stripped down in Chapter 13 proceeding); In re Jordan, 164 B.R. 89, 90-92 (Bankr.E.D.Mo.1994) (debtor not entitled to release of automobile lien upon conversion to Chapter 7).

In view of the weight of the First Circuit, The Bankruptcy Court for the District of Massachusetts concluded that Dewsnup is not determinative of the issue and does not prohibit lien bifurcation in cases involving mortgages secured solely by principal residences of Chapter 13 debtors. Dewsnup held that section 506(d) cannot be used as a cramdown provision in Chapter 7 cases. Dewsnup makes clear that the unilateral restructuring of mortgage debt in a Chapter 7 case is improper. The Court in Dewsnup expressly limited its analysis to section 506(d) and confined its decision to the Chapter 7 case before it. It did not rule that either bifurcation or ?lien-stripping? is impermissible outside of Chapter 7. See Dewsnup v. Timm, 502 U.S. at —-, 112 S.Ct. at 778. Nowhere in Dewsnup did the Court disapprove of bifurcation under section 506(a) in the context of Chapter 13 reorganization cases. In re Richards 151 b.r. 8

Full post as published by Bankruptcy Articles & Blog on December 20, 2008 (boomark / email).