The Oakland bankruptcy judges have ruled consistent with one another that homeowners can strip underwater liens from their homes in Chapter 20 bankruptcy.
Before you run off to the law library looking for Chapter 20, I confess that “Chapter 20” is bankruptcy lawyer shorthand for a Chapter 13 case following a Chapter 7 case.
7 + 13 = 20
Since BAPCPA, the “reform” act of 2005, the debtor can’t get a discharge in a Chapter 13 case filed sooner than 4 years from the filing of the earlier Chapter 7 case. But the Chapter 13 case can still be filed, a plan proposed, and the stay invoked in the no discharge 13. The case just doesn’t conclude with a discharge.
So the courts have been presented with the question of whether the ability to strip off a totally unsecured junior mortgage required a discharge, or just plan completion. Jay Fleischman cited the two lines of cases in his article on lien stripping in Chapter 20.
The Oakland bankruptcy bench has had the issue of lien strips in Chapter 20 cases under submission for most of 2012. The judges were clearly trying to come to a common view of the issue. Otherwise, the result in any given case would ride on the chance draw of a judge.
Judge William Lafferty has joined Judge Efremsky in holding in favor of Chapter 20 lien stripping. His decision came in the case of Franklin Little, No. 11-73376. I applaud both the reasoning and the result.
It’s my expectation that stripping off mortgages that are without a shred of economic value today will strengthen the housing recovery. It will make it possible to envision a sale of homes in the conventional manner. With an underwater lien in place, a property can only be sold with the consent and cooperation of the junior lender. Obtaining those consents has been an iffy and time consuming process.
The elimination of worthless liens also gives homeowners an economic reason to stay in the home and continue paying on the senior lien. Without the lien strip, most homeowners I see can’t expect to have equity in their homes for decades, if ever. Homeownership, for those borrowers, is just tax advantaged renting.
I wish my Los Angeles bankruptcy colleague Jay Fleischman equal good fortune with decisions in the Central District. Or better yet, a 9th Circuit decision that would resolve this issue for certain across the West.
Image courtesy of Leo Reynolds.