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, finding the debts totally unsecured.
In each case, it was agreed that the home was underwater, that is, worth less than the amount owed on the first-position loans.
lthough the non-filing spouse in each case had filed a prior Chapter 7, and discharged any personal liability on each secured debt, the Court said that did not matter in its opinion.
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.
Section 506 of the U.S. Bankruptcy Code says 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 lien of $131,117.98, and a second mortgage of $48,262.48.
The other was worth $100,000, with a first 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.
The creditor has appealed to the District Court for Eastern Michigan.
About Kurt O'Keefe, Attorney at Law
Solo practitioner, 30 years in practice, certified in Consumer Bankruptcy by the American Board of Certification, Michigan State Chair for the National Association of Consumer Bankruptcy Attorneys, over 170 members, Martindale-Hubble av rated (highest rating), lecturer for National Business Institute and NACBA in Michigan, Illinois, California, Louisianna
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