The 8th Circuit Bankruptcy Appellate Panel has allowed a debtor who was ineligible to receive a discharge in a Chapter 13 case to strip wholly unsecured liens filed against a debtor’s homestead. In the case of In re Fisette, No. 11-6012 (8th Cir. BAP Aug. 29, 2011), the debtor was ineligible to receive a discharge because he had received a discharge in a Chapter 7 case filed within four years of filing Chapter 13. Bankruptcy Code Section 1328(f) prohibits a court from granting a Chapter 13 discharge if a debtor had received a discharge from a previous Chapter 7 case filed within 4 years of filing Chapter 13.
This case is significant for two reasons:
- The case settles a disagreement among the bankruptcy courts of the 8th Circuit (Minnesota, North Dakota, South Dakota, Missouri, Iowa, Nebraska and Arkansas) as to whether bankruptcy courts could strip wholly unsecured second mortgage liens (i.e., the home is worth less than the balance of the first mortgage).
- Lien Stripping is allowed even in cases where a debtor is ineligible to receive a discharge because of a prior Chapter 7 bankruptcy.
Michael Fisette owned a home that he valued at $145,000 on his bankruptcy schedules, but the balance of his first mortgage loan exceeded the value of his home. He also had a second and third mortgage loans that caused the home to be worth substantially less than the loans against it. Given the nationwide trend of lower home values, it made little sence for Mr. Fisette to keep his home unless the 2nd and 3rd mortgage liens could be terminated.
Lien Stripping is a power that exists in Chapter 13 cases but not in Chapter 7. The ability to strip a junior mortgage lien is one of the critical factors to consider when deciding what type of bankruptcy to file. The ability to strip a junior lien is often the key factor in deciding whether to keep a home.
Bankruptcy attorneys should give special attention to cases where it appears that very little if any equity is attached by a second mortgage. In cases where the value of the home is almost equaled by the balance of the first mortgage, the debtor should be encouraged to obtain an appraisal of the home. Other significant factors to consider include the following:
- Tax Assessment value of home.
- Date the home was purchased.
- Purchase price of the home.
- Amounts invested to improve the home.
- Significant repairs required.
- Sales prices of homes in nearby neighbors.
- Condition of adjacent homes.
Lien stripping in Nebraska requires the bankruptcy attorney to file an Adversary Proceeding in the Chapter 13 case. Basically, you have to sue the junior mortgage company to request the Court to determine the value of the home and the amount of each lien. I see too many debtors blindly filing Chapter 7 cases without considering the tremendous benefit of stripping that home equity line of credit or debt consolidation second mortgage.