Vincent Howard and our Temecula foreclosure defense attorneys have written a lot here about avoiding mortgage liens in bankruptcy. This is rare, usually requiring that there be a problem with the way the mortgage was made or recorded. It's often to the debtor's advantage because it releases him or her from obligation to pay the mortgage. But at the same time, avoiding the lien in bankruptcy means that the trustee has first priority on the home and its equity, which benefits creditors rather than the debtor. In most cases, that's fine with a debtor who was expecting a foreclosure anyway, but in In re Traverse, Virginia Traverse was current on her mortgage. The bankruptcy court permitted the trustee to avoid the lien, rejecting Traverse's counterclaim seeking a declaration that the trustee could not sell her home without first foreclosing.
Traverse took out her mortgage for $200,000 in 2005 from Washington Mutual, which sold the mortgage to JP Morgan Chase. Chase failed to record the mortgage. Traverse later took out a home equity loan from CitiBank. When she filed for Chapter 7 bankruptcy, she listed a Citi mortgage for $29,431.04 and a Chase mortgage for $185,777.30. She also claimed the home was worth $223,500 and claimed a Massachusetts homestead exemption for $500,000. The homestead exemption wasn't challenged, but the Chapter 7 trustee filed an adversary complaint seeking to avoid Chase's unperfected mortgage. Traverse's counterclaim claimed that even if the lien was avoided, he couldn't sell her home without foreclosing according to state law, and that he couldn't foreclose because the mortgage was not in default; he could only sell the mortgagee's interest. The trustee opposed this as premature because no sale was scheduled. The bankruptcy court found for the trustee.
On appeal, the First Circuit Bankruptcy Appellate Panel first dismissed a jurisdictional argument from Traverse, who argued that the bankruptcy court was not legally able to enter a final judgment on a state-law cause of action. There was no state-law cause of action here, the BAP said, because the trustee is essentially already the owner of the property and need not foreclose. The meat of the appeal was a dispute about whether the trustee merely replaces Chase as mortgagee by avoiding the lien, or steps into the shoes of Traverse, the homeowner. The panel again found for the trustee. When Traverse filed for bankruptcy, the panel said, her rights to both possession of the property and redemption of the liens transferred to the bankruptcy estate. The estate benefits because Chase is now an unsecured creditor, the court said, and Traverse may continue to claim her homestead exemption.
Of course, that homestead exemption is not worth much to Traverse, because this decision permits the trustee to sell her home. Vincent Howard and our Huntington Beach foreclosure defense lawyers would have preferred to see a different decision here, because this one penalizes Traverse for a mistake made by Washington Mutual--its failure to record the lien. It seems rather unkind to permit a foreclosure on a person who was current on her mortgage and, presumably, didn't realize there was an issue with the recording of the lien. When homeowners come to Vincent Howard and our Highland foreclosure defense attorneys, we work with them to determine whether their amount of equity and the type of bankruptcy they prefer will threaten or protect their homes.
If you're in foreclosure or afraid you will be soon, and you'd like to discuss your legal options with an experienced attorney, call Howard Law, P.C., today. You can reach us at 1-800-872-5925 or send us a message through our website.