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Bankruptcy Panel Permits Divorced Debtors to Avoid Judicial Liens on Home - White and White v. Commercial Bank & Trust

November 17, 2011

Our Corona foreclosure defense lawyers were interested to read a decision involving divorced former spouses who both filed for bankruptcy and both sought to avoid the same lien from their lender. In the consolidated appeals of Jeffrey White v. Commercial Bank & Trust and Jennifer White v. Commercial Bank & Trust, the former spouses had both filed Chapter 7 bankruptcies, after which Commercial objected to their homestead exemption claims and moved for relief from the automatic stay so it could foreclose. Both Whites responded with motions to avoid Commercial's judicial liens. The bankruptcy court consolidated the cases and ultimately allowed both the exemption and the foreclosures. On appeal, however, the Bankruptcy Appellate Panel of the Eighth Circuit reversed, finding the liens avoidable.

The Whites bought 220 acres in Wilmar, Arkansas in 1991, while they were still married, and paid off their loan in full by selling off 60 acres. However, they took out a total of eight loans from Commercial between 2004 and 2007, using other property as collateral. They defaulted, the bank foreclosed, and they ended up with a deficiency judgment of $161,000. That debt became a judicial lien against their Wilmar property, and the bank started foreclosure on that property in December of 2009. In June of 2010, the Whites divorced and split the property in half. In August of 2010, a court ordered a foreclosure sale of the Wilmar property, but both Whites filed for Chapter 7 bankruptcy before the sale could take place. Each claimed a homestead exemption for 80 acres, to which the bank objected. It moved for relief from the stay so it could foreclose, and both Whites moved to avoid the lien. In the consolidated cases, the bankruptcy court denied the motions to avoid the lien, denied Commercial's objection to the homestead exemptions and granted relief from the stay. This appeal followed.

The BAP found that the "crux of this appeal" was the avoidance motion, since Commercial's argument for relief from the stay relied on the argument that the lien was unavoidable. The bankruptcy code says debtors may avoid judicial liens if they impair exemptions to which the debtors would otherwise be entitled. There's no question that the Whites' properties are entitled to a homestead exemption under Arkansas law, the court said. The bankruptcy court had found that the lien was not avoidable because it had fixed in December of 2009, when the foreclosure judgment was entered, and the parties' ownership interests were fixed during their June 2010 divorce. However, the BAP found that the property did not change hands at that time; the manner in which the two Whites held the property merely changed. Thus, it allowed both Whites to avoid the lien. Finally, the BAP ruled that the relief from stay part of the appeal was moot, since the Chapter 7 cases had both been discharged.

As Yorba Linda foreclosure defense attorneys, we're pleased with this ruling. Divorce and bankruptcy often go hand in hand, unfortunately, because financial problems can trouble a marriage and because splitting a household into two is expensive. As a result, while this situation doesn't come along every day, courts absolutely do get asked to decide on complicated property-splitting issues for divorcing couples in a bankruptcy -- in fact, this case cited two that made it to the U.S. Supreme Court. By deciding that the divorce didn't change the fact that the Whites both had a property interest in the land, the court gave people in their position another tool to avoid liens. As Fallbrook foreclosure defense lawyers, we appreciate having many tools in our arsenal when we fight to keep our clients' homes out of foreclosure.

If you're in default or foreclosure, or you expect to be there soon, you should call Howard Law, P.C., to discuss how we can help. For a consultation, send us a message online or call 1-800-872-5925.

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