By Ryan C. Wood
Yes, you can still strip off an underwater junior lien or mortgage when filing a bankruptcy under Chapter 13, 11 or 12. A recent Supreme Court of the United States holding in Bank of America, N.A. v. Caulkett, 13-1421, is about lien stripping in Chapter 7 cases. I was watching KQED and the National Business Report was on. One of the reports was about fifteen seconds long and all the anchor said was, “The Supreme Court of the United States held today that you cannot lien strip in bankruptcy.” I could not believe my ears. I kept waiting for the anchor to say, “when filing a chapter 7 bankruptcy case.” It never happened. So again, you can strip off a completely unsecured junior lien from your house or investment property when filing a chapter 13, 11 or 12 bankruptcy reorganization case.
You Can Still Strip Off Completely Underwater Junior Liens In Reorganization Chapters
The reorganization chapters are 11, 12 and 13. The difference between these three types of reorganization bankruptcy cases is extremely complex. Just know that you can submit a plan of reorganization that includes a provision to strip off completely underwater mortgages or liens and treat the secured debt as a general unsecured debt in bankruptcy. The Supreme Court of the United States in Bank of America, N.A. v. Caulkett addressed the Eleventh Circuit stepping out on its own from other circuit courts and allowing at least two chapter 7 bankruptcy filer’s to strip off completely underwater junior liens from their property. The issue was whether the liens could be stripped off pursuant to Section 506(d) of the Bankruptcy Code. This section provides: “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” 11 U. S. C. §506(d). More or less the Supreme Court of the United States held the second mortgages or underwater junior mortgages are allowed secured claims and therefore cannot be stripped off pursuant to Section 506(d). The chapter 7 bankruptcy filer’s bankruptcy attorney argued that the junior liens are not secured given the value of the senior lien and the property, there is no equity or value in the junior lien. Unfortunately for the debtors a definition of “secured claim” in Section 506(d) was adopted in Dewsnup v. Timm, 502 U.S. 140 (1992). The underwater junior lien is still secured by the property even if the property has no value for the lien under Section 506(d) and the use of the term “secured claim.” Did that make sense? Probably not if you are a bankruptcy lawyer and understand that a secured claim is only secured up to the value of the collateral or property. But that is under Section 506(a) and the Court plainly says the term “secured claim” is not defined the same between the two subsections of 506 of the bankruptcy code. This is one of the rare times that the “application of the normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning” Desert Palace, Inc. v. Costa, 539 U. S. 90, 101 (2003), does not apply. For a more detailed analysis as to why “secured claims” is defined differently within the same section of the bankruptcy code read the Dewsnup and Caulkett cases in their entirety.
Bankruptcy News
Over and over again I find the mass media has virtually zero understanding of bankruptcy law or how to approach reporting on bankruptcy cases. According to many in the mass media Donald Trump has filed bankruptcy. Just Google his name and see what you find. Ah, no. Donald Trump has never filed for personal bankruptcy protection. Another good one is if you file chapter 13 you have to pay all of your debts back. Okay, well, if that were true then how is filing chapter 13 bankruptcy helpful? I do not think I have ever heard of an actually bankruptcy attorney appearing on a newscast to provide any commentary about the bankruptcy subject or story. Some of the larger municipal bankruptcy cases have received more coverage. It is rare for municipalities to file for bankruptcy protection under chapter 9. I wonder how many chapter 13 clients will call us asking about the recent Supreme Court of the United States holding regarding chapter 7 bankruptcy cases and lien stripping. If they watched KQED and NBR when I was they will be confused.
