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Depressed Property Values & Valueless Liens

By Cathy Moran

Filing bankruptcy to eliminate an underwater lien is perfectly acceptable, says the 9th Circuit Bankruptcy Appellate Panel.

Whew!

Sometimes the wave of hostility to debtors that resulted in bankruptcy “reform” in 2005 seems to continue to poison judicial attitudes toward my clients.

The Lepe decision is refreshingly different and supportive.

The facts

Angel Lepe filed his Chapter 13 case to strip off a second lien on his home.  He had less than $500 of other, unsecured debt.

The junior mortgage attached to no equity in the home.  All of the value in the collateral was pledged to the holder of the first lien.  Today’s reduced real property values left nothing to secure the second mortgage.

The Chapter 13 challenged Lepe’s plan as lacking the “good faith” required by the bankruptcy code for plan confirmation.  The homeowner is solvent, complained the trustee and can pay his bills.  He’s only in bankruptcy to get rid of the underwater mortgage.

The decision

That’s OK said the appellate court.  You can’t find a lack of good faith based solely on doing what the bankruptcy code allows,  wrote Chief Judge Pappas.

The BAP opinion reviewed a number of older decisions about good faith and reminded us that the lists of factors in those cases represent a beginning, not the end, of the analysis of whether the debtor demonstrates good faith.

Where the Chapter 13 plan provided for meaningful monthly payments to creditors, some of which would flow to the creditor with the valueless lien, the bankruptcy judge and the appellate panel both found that a plan motivated by the desire to strip a lien was permissible.

The future

Perhaps the only good thing to come out of the Great Recession and the surge of bankruptcy cases is the ability of many homeowners to shed valueless liens through Chapter 13.

To void a lien,  the value of the property must be less than the amounts owed on liens senior to the lien to be stripped.  If there is one dollar of value over the total of the senior liens, the junior lien cannot be altered.

Thus, if we are to see an improvement in housing values, homeowners who do nothing may find the window of lien strip opportunity has closed.

Image courtesy of GioPhotos.

 

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Filed Under: Real property & mortgages

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Bankruptcy Basics

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You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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