Underwater liens that linger after an earlier bankruptcy don’t count in Chapter 13.
At least, they don’t count against the unsecured debt limit that restricts entry into Chapter 13, says the 9th Circuit Bankruptcy Appellate Panel in Free.
Great news for homeowners for whom Chapter 13 was not initially available because they exceeded the debt limits.
Free settles the question of whether the lien that passed through a prior bankruptcy case is a “debt” counted for eligibility purposes in a subsequent Chapter 13 if there is no collateral value to secure it. The answer is no.
Neither the Code nor case law compels inclusion of the discharged in personam liability in such calculation.
What survives a bankruptcy discharge
Without getting so technical that only a lawyer would care, the problem when a Chapter 13 case is filed after a Chapter 7 is characterizing what’s left of the liens in effect when the 7 was filed.
The Chapter 7 discharge eliminated any personal liability of the debtor for the debt that was secured by a lien, but left the lien as a valid charge on any collateral to which it had attached. [Read more…]