Led by Vincent Howard, our Riverside County foreclosure defense attorneys represent many clients who are trying to stop or reverse a foreclosure by filing for bankruptcy. This is not appropriate in every case, but bankruptcy absolutely can help people who need extra time to catch up with payments, or need a court to examine their predatory lending claims when previous efforts were not successful. Bankruptcy also automatically stops all debt collection efforts, which can provide a brief window of breathing space. But in In re Lepe, the trustee for a Sacramento-area bankruptcy argued that the bankruptcy was filed in bad faith, only to invalidate a second mortgage. The Bankruptcy Appellate Panel of the Ninth U.S. Circuit Court of Appeals ultimately upheld the plan of Angel Lepe.
Lepe filed for Chapter 13 bankruptcy in September of 2010, listing $581,380 in liabilities, including only $549 of unsecured debt. His bankruptcy plan proposed to pay his first mortgage directly, but "strip" his second mortgage, which would treat the debt as if it were unsecured. Unsecured debtors would take from $150 a month paid to the trustee. No creditors objected, including the one that held the second mortgage. But the trustee did object, arguing that Lepe's plan and his bankruptcy were not filed in good faith. Because Lepe had enough income to pay his expenses and debts, the trustee argued, and because he had very little unsecured debt, he must have filed the bankruptcy only to strip the second mortgage, an abuse of the bankruptcy code. Ultimately, the bankruptcy court found any omissions were inadvertent, that unsecured debt does not make Lepe ineligible for Chapter 13, and confirmed the plan.
On appeal, the trustee contended that Lepe's plan and bankruptcy were abusive and should not be confirmed, though he conceded Lepe has not been "bad." Nonetheless, the trustee believed that stripping a second mortgage when otherwise solvent was not within the "spirit or purpose" of Chapter 13. The panel ultimately rejected both this argument and the trustee's interpretation of the facts. Ninth Circuit precedent says good faith can't be determined by any one factor in the plan, the panel said; courts must look at the totality of the circumstances. The trustee's argument that Lepe had unfairly manipulated the bankruptcy code focused on only part of such an analysis, the court said. Furthermore, the panel said, Lepe was not "balance-sheet solvent" even if he had enough cash flow to pay his expenses. His situation was "indisputably dire" despite his small amount of money for unsecured debt, and insolvency is not a requirement in any case, the BAP said. Thus, it upheld the confirmation of Lepe's plan.
These "lien strip" cases are becoming more and more familiar to Vincent Howard and our Orange foreclosure defense lawyers because they've popped up more and more since the housing crash. In a typical lien strip case, the property securing the lien has lost so much value that there's no equity backing the lien, permitting the bankruptcy plan to "strip" it and treat it as unsecured. This might apply to a second mortgage, HELOC or other secondary encumbrance on property that's lost a lot of value. It's entirely possible that something similar happened to Lepe, who may have been one of those affected by the sharp housing downturn in greater Sacramento. Vincent Howard and our Moreno Valley foreclosure defense attorneys represent many clients with similar situations, especially in the Inland Empire and Orange County, and stripping a lien is one option we discuss when appropriate.
If you're facing a foreclosure or believe your loan was deceptive or predatory, you should call Howard Law, P.C., to discuss your legal options. You can send us a message through our website or call toll-free at 1-800-872-5925.