Filing bankruptcy to eliminate an underwater lien is perfectly acceptable, says the 9th Circuit Bankruptcy Appellate Panel.
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. And provides a window of opportunity to homeowners.
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.
There was no equity in his home for the junior lien to attach to. 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 trustee 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.
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.
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 an underwater lien 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.