August 29, 2014
by Elizabeth M. Abood-Carroll
Orlans Associates, P.C. – USFN Member (Michgan)
A bankruptcy appellate panel (BAP) in the Sixth Circuit recently reversed a bankruptcy court and ruled that a wholly unsecured lien can be stripped in a “chapter 20” case. In the bankruptcy world, a “chapter 20” is an unofficial term that refers to a debtor who files and completes a chapter 7 case and subsequently files a chapter 13 case in a short period of time.
The debtor in In re Cain, 2014 Bankr. LEXIS 3060 (BAP 6th Cir. July 14, 2014), obtained a chapter 7 discharge. A few months later, she filed a chapter 13 case seeking, in relevant part, to avoid a wholly unsecured second mortgage on her residence. Due to the chapter 7 discharge within the preceding four years, the debtor was not eligible for a discharge in her chapter 13 case, pursuant to 11 U.S.C. § 1328(f).
Upon the successful completion of her chapter 13 plan, the debtor filed a motion to avoid the second lien. The motion was unopposed. The bankruptcy court denied the motion by relying on 11 U.S.C. § 1325(a)(5)(B), which says a chapter 13 plan must provide for a secured creditor to retain its lien until either the debt is paid in full or the debt is discharged. Because the debt was not paid in full and the debtor was ineligible for a discharge, the bankruptcy court ruled that the debtor was not entitled to strip the second mortgage in her chapter 13 case.
The BAP found the lower court had erred in denying the lien strip. The B.A.P. recognized that the issue has not been addressed by the Sixth Circuit; and it relied on Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663(6th Cir. 2002), which permits a lien strip on a debtor’s principal residence if it is wholly unsecured under 11 U.S.C. § 506(a). The relevant inquiry is whether the claim is secured or unsecured.
In regards to the debtor’s ineligibility to receive a discharge, the BAP ruled that ineligibility under § 1328(f) does not prevent the debtor from receiving other types of relief under Chapter 13.
In this case, there was no dispute that the second lien had no value. Consequently, the BAP ruled that second lien was to be treated as an unsecured claim and was not protected by the requirements of § 1325. The determining factor was the wholly unsecured status of the creditor’s claim rather than the debtor’s ineligibility for a discharge.
(Note: The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.)
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