Vincent Howard and our Ontario personal bankruptcy attorneys were pleased to see a ruling on the scope of the 2005 changes to the bankruptcy law. In Branigan v. Davis, the issue was whether a portion of mortgages may be "stripped" from underwater properties in a Chapter 13 bankruptcy filed within four years of a successful Chapter 7. The trustee argued that the Bankruptcy Abuse Prevention and Consumer Protection Act forbade lien-stripping per se in these so-called "Chapter 20" cases. The bankruptcy court disagreed, and permitted Bryan Davis and Carla Bracey-Davis, and Marquita Moore, to bifurcate their home loans into secured and unsecured claims. The trustee appealed this to the district court and then to the Fourth U.S. Circuit Court of Appeals, but all of the courts affirmed.
Both the Davises and Moore, who filed two separate bankruptcies, had originally filed Chapter 7 bankruptcies that resulted in discharges, but re-filed in Chapter 13 so they could strip liens on real estate that had too little value to secure the liens. The Davises waited nearly a year between bankruptcy cases, during which time they had hoped for a loan modification and Bracey-Davis found a new job. Moore waited a week. In both cases, trustee Timothy Branigan challenged orders confirming their motions to strip the liens, and confirming their plans, but the bankruptcy judges ruled that BAPCPA does not create a per se rule against lien stripping in "Chapter 20" cases. The district court consolidated the two appeals and affirmed the rulings without comment.
The Fourth Circuit also affirmed the rulings. It first noted that previous unpublished rulings, and rulings from sister circuits, support the practice of stripping off now-valueless liens from encumbered property. Thus, a lien with no value--such as a second mortgage made during the real estate bubble--can be turned from a secured debt into an unsecured one by the bankruptcy court, then have the lienholder's rights modified in any way the court pleases. Bankruptcy courts are more split on lien stripping in "Chapter 20" cases, because BAPCPA forbids Chapter 13 debtors from receiving a discharge within four years of a Chapter 7 discharge. The trustee argued that lien-stripping depends on the availability of a discharge. However, the Fourth ultimately disagreed. The provision the trustee (and some courts) relied on applies only to a claim that has been valued, and thus does not apply to worthless liens, the court said. Congress had an opportunity to stop lien-stripping with BAPCPA, the court noted, and did not take it.
Vincent Howard and our Orange consumer bankruptcy lawyers are pleased by this result. Lien stripping has become common in the aftermath of the housing downturn, as many, many homeowners have found their mortgages underwater and been driven to bankruptcy. Stripping a lien doesn't necessarily benefit the bankruptcy filer in the short run--because the money freed up typically just goes to other creditors--but in the long run, it can mean fewer mortgage payments. And the ability to pay off other creditors is important, as anyone with a non-dischargeable tax or child support debt knows. Vincent Howard and our Norco individual bankruptcy attorneys hope this ruling, and others like it, will give access to that remedy to people who end up in "Chapter 20."
If you are ready to consider bankruptcy as a way to deal with overwhelming mortgage debt or any other kind of debt, don't hesitate to call Howard Law, P.C. for help. You can reach us online or call 1-800-872-5925.