Another Appeals Court Approves 2nd Mortgage Stripping in Chapter 20 Cases

19 Jun Another Appeals Court Approves 2nd Mortgage Stripping in Chapter 20 Cases

Huis en hypotheek onder water

The U.S. Court of Appeals, Eleventh Circuit, ruled that in a chapter 13 case filed within four years of a previous chapter 7 case (a so-called “chapter 20”), the chapter 13 plan could strip a completely unsecured junior mortgage. Wells Fargo Bank v. Scantling, No. 13-10558 (11th Cir. June 18, 2014). In such chapter 13 plans, the junior mortgage is eliminated and never has to be paid back.

The lack of a discharge from debt at the conclusion of the chapter 13case, due its having been filed on the heels of a chapter 7, was not viewed as a problem by the appeals court.

The debtor filed for chapter 7 on November 27, 2009, and received a discharge. On January 1, 2011, the debtor filed for chapter 13, listing the home’s value at $118,500. The first mortgage had a balance of $121,808; the second mortgage $79,369; and the third mortgage $24,416.

These figures indicated that the second and third mortgages were not secured by any actual value of the home. This was due to the first mortgage balance being in excess of the home’s value.

Because the second and third mortgages were in actuality unsecured debts, the chapter plan sought to treat them as stripped or eliminated after completion of payments under the plan, even though no discharge could be granted.

The appeals court held that bankruptcy code sections 506(a) and 1322(b) operated to classify wholly unsecured junior mortgages as unsecured claims to be stripped from the property. It rejected the bank’s argument that section 1325(a)(5) required a discharge to be entered before a mortgage lien could be stripped. The court reasoned that by its terms, section 1325(a) applied only to secured claims, and the junior mortgages in the present case were not secured by any value of the home.

The appeals court concluded that the right to receive a discharge upon completion of payments under the plan was irrelevant to whether the junior mortgages could be stripped from the home.

Image credit: © emieldelange – Fotolia.com

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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