Chapter 13 Lien Stripping: Effective At Confirmation

02 Sep Chapter 13 Lien Stripping: Effective At Confirmation

Most legal professionals are of the opinion that a chapter 13 mortgage lien strip should not be effective until discharge or plan completion. They take this position, even though there is no such authority for the same anywhere in the code.

The better position, is that lien strips of wholly unsecured mortgages should take place immediately. This is primarily due to the language of 506(d) which states “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” Indeed, 506(d) contains no reference whatsoever to plan completion or discharge. Likewise, 506(a) valuations also contain no reference to plan completion or discharge.

While creditors might argue that immediate removal of a mortgage prior to plan completion or discharge might allow a debtor to “play the system” and eliminate a mortgage and immediately dismiss or convert the case to chapter 7, such an argument is flawed in light of 11 USC 348 and 11 USC 349. These provisions provide that dismissal or conversion reinstates any previous lien voided under 506(d). Accordingly, the creditor is still protected.

Recently, a local Chapter 13 Trustee brought forth very same argument in the Bankruptcy Court for the Southern District of California. The Chapter 13 Trustee argued in moving papers that the“order stripping junior deed of trust must recite that it is subject to successful completion of chapter 13 plan.”

While other issues required continuing the confirmation date and final resolution at that time, the Bankruptcy Court disagreed with the Chapter 13 Trustee and issued a tentative ruling allowing an earlier “stripping date.” Specifically, the Court stated that the lien strip order could be entered at confirmation:

“Trustee’s objection re: effective date of lien strip is not well taken. Millspaugh (at p. 103) is well- reasoned and persuasive on the issue of the effective date of the lien strip–the date of plan confirmation.”

Accordingly, at least in the Southern District of California, it appears that mortgage lien stripping may take place well before plan completion and discharge.

Written by Michael G. Doan

See a recent study recommending lien-stripping as another tool in the arsenal to prevent home mortgage foreclosure.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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