Stripping down in court is typically disfavored and a quick way to get kicked out. But, as with all things legal, there’s an exception for a different kind of stripping: stripping liens.
Stripping Liens Basics
Stripping Liens, authorized by 11 U.S.C. § 506, conceptually divides certain claims secured by liens on property into two claims: an unsecured claim and a secured claim. For example, let’s say Creditor A has loaned a debtor $100,000 and secured that loan with a mortgage on property. Then Creditor B loans debtor $50,000 secured by a second mortgage on the property. The debtor files for bankruptcy at which time the value of the property is only $125,000. Upon the debtor’s request, the court may deem $25,000 of Creditor B’s claim secured based on the value of the property and the remainder unsecured. This re-categorization means that under 11 U.S.C. § 506(d), the debt is arguably void because it is not an “allowed secured claim.”
The Big HOWEVER
Lien stripping is a very powerful, very debtor friendly tool, but it’s availability has become increasingly limited. Since a 1992 US Supreme Court decision, lien stripping of partially secured claims in Chapter 7 was prohibited. For a number of years, lower courts continued to permit lien stripping where the claims where wholly unsecured (called a “strip off”). In the above example, this would be the case if the value of the property was only $100,000 because the second mortgage would not have any value to be secured by. As discussed in an earlier bankruptcy blog, the Supreme Court ended this practice this year in Bank of America v. Caulkett when it held its earlier decision applied equally to wholly unsecured liens.
What About Stripping Liens Chapter 13?
The US Supreme Court cases only addressed the strip down process in Chapter 7 claims, leaving the question open: what about Chapter 13 cases? We haven’t seen a Florida case on the issue yet, but the majority of courts that have addressed this issue so far have found that Caulkett is inapplicable to Chapter 13 cases.
One Chapter 13 related strategy that seems foreclosed in Florida is filing a Chapter 13 action after a Chapter 7 action for the sole purpose of lien stripping. In In re: Gerardin, the bankruptcy court in the Southern District of Florida, consolidated seven cases where the debtors filed Chapter 13 cases shortly after receiving a Chapter 7 discharge. Each of the debtors had one purpose: strip off junior property liens. These debtors were not otherwise eligible to file for Chapter 13 bankruptcy. After considering prior cases and the policy implications, the court ultimately held that the debtors who are ineligible for a Chapter 13 discharge, cannot use a Chapter 13 plan to strip off a wholly unsecured mortgage.
Your Case Strategy for Stripping Liens
As always, feel free to contact the experienced Jacksonville bankruptcy attorneys at Adam Law Group to discuss stripping liens and your bankruptcy strategy