As Riverside personal bankruptcy lawyers, we were interested to see a rare reversal of a Chapter 13 bankruptcy plan appealed by the debtor. In Fisette v. Keller, debtor Michael Fisette of Minnesota objected to the bankruptcy plan drawn up by trustee Jasmine Keller against his will. Fisette owned a home that, like many American homes, was "underwater"; he owed more than the home was worth. This was bad news for the holders of the second and third mortgages, whose liens against the property he proposed to strip. When the bankruptcy court declined to approve such a bankruptcy plan, Keller wrote up a new plan that proposed to treat the lienholders like secured creditors. The Bankruptcy Appellate Panel of the Eighth Circuit reversed, finding the law did not prohibit lien-stripping.
Fisette owed $176,312 on the first mortgage, but the home was appraised at just $145,000. He had recently been through a Chapter 7 bankruptcy and was ineligible for discharge until more time had passed, but filed for Chapter 13 bankruptcy anyway. In his proposed Chapter 13 plan, he treated that mortgage -- the senior lien -- as secured, but the junior two liens as unsecured debt, because there was no equity for them to attach to. He proposed no payments to the junior lienholders under the plan, with discharge after he completed all payments in the plan. He also did not propose to pay them as unsecured creditors. The lienholders filed no written objections, but the bankruptcy judge said the law does not allow lien-stripping and denied the plan. Over Fisette's objection, Keller submitted a new plan that allowed junior lienholders to keep their liens and treated them as secured. This plan was approved. Fisette appealed to the Bankruptcy Appellate Panel, arguing that bankruptcy debtors should be allowed to strip unsecured junior liens.
Supreme Court precedent holds that bankruptcy plans may not modify unsecured portions of mortgage debts, but the Eighth's panel said the court did not rule on whether they may strip wholly unsecured debts. And a variety of Minnesota bankruptcy court cases have held that debtors may never strip claims secured by interest in a primary home -- that is, that any home lien is unstrippable. The panel disagreed, saying every circuit court to address the issue has held that bankruptcy plans may strip wholly unsecured junior home liens because they are modifiable under bankruptcy law. However, it said, courts are split on whether a bankruptcy debtor may do this when he is ineligible for a discharge. Noting that nothing in the bankruptcy code requires discharge eligibility for lien-stripping, the court ruled that lien-stripping is contingent only on successfully completing the bankruptcy plan payments. However, the junior lienholders should be treated like any other unsecured creditor, the court said, so they should get a share of any payments to those creditors. The panel remanded the case for modification of the Chapter 13 plan.
Our Fullerton individual bankruptcy attorneys are pleased with this ruling, which joins a similar ruling here in the Ninth Circuit. "Stripping" a junior lien has become a common practice -- which may be why Fisette's creditors did not object -- since the housing crisis began. Because so many homeowners are underwater, any second or third lien is likely to be unsecured under bankruptcy law and thus subject to stripping. This can be very advantageous to homeowners who decide to pursue bankruptcy as a strategy for fighting foreclosure. However, bankruptcy is a major financial decision that might not be appropriate for all underwater homeowners, so it's best to talk to an experienced San Diego County foreclosure defense lawyer about your options. Our firm can also help borrowers negotiate with lenders or pursue their rights through litigation.
If you'd like to explore how bankruptcy could help with a serious mortgage problem, you should call Howard Law, P.C., for a free, confidential consultation. To get in touch, send us an email or call 1-800-872-5925.