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Defenses to Lien Stripping

Offense is the Best Defense...

The Schaller Law Firm is an aggressive litigation-minded firm that prides itself on aggressively defending mortgagees to protect their mortgage investments from lien stripping attacks in bankruptcy cases.

The Schaller Law Firm believes each lien stripping lawsuit is a serious attack upon a mortgagee’s full mortgage investment in that particular piece of property. As such, the Firm aggressively defends mortgagees to ensure mortgagees have the best opportunity to save their mortgage investments and collect future mortgage payments on performing loans and collect pre-petition arrearages through the Chapter 13 plan.

The failure to defend aggressively could result in mortgagees losing their entire investment in properties whose liens were stripped. The underlying bankruptcy case would discharge the debtor’s obligation to pay future mortgage obligations and terminate the lien protection formerly enjoyed by mortgagee. In short, the mortgagee could lose everything.


LIEN STRIPPING IS A LAW SUIT
(Mortgagees are being attacked!)

A litigation-minded approach is essential to a strong defense. Mortgagees must change their mindset to recognize that they are parties to lawsuits and now need to protect themselves and their assets. A lien stripping action is not time to engage "high volume" attorneys who utilize boiler-plate motions to lift the automatic stay. Instead, the litigation mentality must be employed to defeat the lien stripping lawsuit and preserve mortgagees’ mortgage investments.

A failed motion to lift stay could be corrected with little loss to mortgagees. But a failed defense of a lien stripping lawsuit could cause mortgagees to lose in excess of $100,000.

In short, the Schaller Law Firm believes mortgagees should continue to engage "high volume" attorneys to file motions to lift stay, but should engage aggressive litigation-minded attorneys to defend against lien stripping bankruptcy lawsuits.

The Schaller Law Firm is an aggressive litigation-minded firm. You are encouraged to contact attorney Robert Schaller to discuss lien stripping in more detail by calling 630-655-1233 or submitting the Contact Us form.


DEFENSES TO LIEN STRIPPING LAW SUITS

Below is a list of defenses to consider when analyzing any adversary proceeding attempting to strip a junior mortgage.

  1. Strip-Down versus Strip-Off Defense --- the FMV Battle
  2. Ineligibilty Defense
  3. Adversary Proceeding Defense
  4. Inadequate Notice Defense
  5. Equitable Powers Defense
  6. Legal Defense
  7. Post Foreclosure Default Defense
  8. Vacating Order Upon Dismissal
  9. Dismissing Underlying Chapter 13 Case Defense
  10. Settlement Terms

Strip-Down versus Strip-Off Defense --- the FMV Battle

Junior mortgagees are increasingly finding themselves subject to having their liens stripped and avoided in adversary proceedings. So far, these mortgagees have been timid and employing the path of least resistance and fighting a losing battle: fighting the "wholly unsecured mortgage" legal battle (to defeat) while ignoring the "fair market value" battle (to victory). These mortgagees must realize that they are in a fight with a lot to lose (stripped liens and a discharged debt) and need to fight back with aggressive tactics employed by aggressive litigators.

To start, junior mortgagees must position their status as that of an undersecured lien holder and not allow the debtor to position the mortgagee as a wholly unsecured junior lien holder. Almost certainly a debtor who attempts to strip the junior lien will allege that the junior lien is wholly unsecured.

Consequently, the junior mortgagee must challenge the valuation of the debtor’s primary residence and must not accept the fair market value alleged by debtor in the lien stripping adversary complaint. Not surprisingly, debtor’s alleged fair market value would be strategically calculated to result in a value less than the amount of the senior lien. This valuation must not go unchallenged!!!!!!

Debtor’s valuation is self-serving and should be scrutinized for accuracy, challenged for bias, analyzed for credibility, and contested for admissibility. Did debtor proffer a real estate broker’s opinion or employ a certified appraiser? Can the broker’s opinion be challenged because of some conflict of interest resulting from the broker profiting with a contingent listing as a result of an exaggerated broker’s opinion? Did the appraiser inspect the inside of the home or even personally view the home—or was it done over the internet utilizing a "city/village-wide" overall reduction of say 20% for all homes in that city/village? How experienced is the appraiser? Were there other appraisals/brokers’ opinions that were discarded because they showed a higher valuation? These and other questions must be asked by an aggressive litigator. Discovery must be conducted and a trial held.

On the other hand, the junior mortgagee must proffer an opposing valuation from a reputable and certified appraiser demonstrating that the junior mortgage lien is at least partially secured because the true valuation of the subject real estate is greater than the value of the senior lien(s), leaving the junior mortgage lien undersecured.

As Judge Squires noted in the case In re Waters, 276 B.R. 879, 886 (Bankr. N.D.IL 2002), appraisers engage in an "inexact estimation process" … "whose results will hinge on the fluctuating real estate market values." Appraisals are by their very nature only an estimate of the property’s true value. Appraisers, and certainly real estate brokers, have their biases. Take five appraisers and almost certainly you will obtain five different values. Did the appraisers/brokers review the same comparable homes, and consider the location of the subject property in relation to schools, churches, parks, and major roads?

The law is clear and undisputed if the junior mortgagee can demonstrate that the lien is undersecured and not wholly unsecured. If undersecured, the Supreme Court’s decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), controls and debtor’s attempt to strip off and void the junior lien will be defeated.

Again, junior mortgagees must consider the lien strip off and avoidance adversary as a lawsuit. After all the effect of having the lien stripped is to transform the junior mortgagee into an unsecured creditor in a chapter 13 plan. The value of the junior mortgagee’s investment would be reduced considerably. This is a fight the junior mortgagees must be resolved to fight. The junior mortgagees need aggressive litigators to fight this fight.

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Ineligibility Defense

Junior mortgagees can defeat lien stripping adversaries by attacking the underlying Chapter 13 case. A lien stripping complaint would be dismissed as moot if the underlying Chapter 13 case is dismissed for reasons unrelated to the adversary.

One attack on the underlying Chapter 13 case is a motion to dismiss for ineligibility. Such a motion would be appropriate where the to-be-stripped wholly unsecured junior mortgage debt is reclassified into unsecured debt --- which in turn results in the debtor’s total unsecured debt load exceeding the Section 109(e) unsecured debt limit.

This scenario existed in In re Russell & Joy Smith, 20 CBN 246 (Bankr. C.D.CA 2009). There, the court dismissed the debtors’ Chapter 13 case because debtors exceeded the unsecured debt limit after adding the junior mortgage lien balance to the other unsecured debt balance.

The Smith case presented the court with the issue of how secured residential mortgage debt should be treated in determining whether debtors qualify for Chapter 13 relief. The court found that wholly unsecured junior mortgages are counted as unsecured debt and partially secured senior mortgages are counted as secured debt for Section 109(e) purposes. The court based its determination on eligibility on the amount of debt and property values listed in debtors’ schedules --- because there were no allegations that the debtors acted in bad faith.

Debtors had wholly unsecured junior mortgages that, if treated as unsecured debt, would make them ineligible for Chapter 13 relief. The debtors argued that the junior mortgages were unliquidated because it was not yet known whether the debt would be determined to be secured. The court disagreed, ruling that the debts were liquidated because the court could determine whether they were secured at a simple hearing.

In support, the Smith court cited Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir. 2001), established how to treat wholly unsecured junior mortgages. In Scovis, the 9th Circuit held that completely undersecured liens must be counted as unsecured debt for purposes of Section 109(e). The Smith court, however, found that the Scovis case did not apply to partially secured senior mortgages because Section 1322(b)(2) prohibits the modification of these mortgages. Thus, while the bankruptcy court may still value a debtor’s principal residence, the Code does not allow the court to modify an undersecured lien secured by debtors’ residence.

In sum, the court found that debt secured by a wholly unsecured junior trust deed must be counted as unsecured debt for Section 109(e) eligibility purposes where a debtor’s schedules show the senior deeds of trust exceed said debtor’s home value. However, trust deed debt will be counted as secured debt for Section 109(e) purposes where a trust deed is partially secured on a debtor’s primary residence.

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Adversary Proceeding Defense

Junior mortgagees should (a) object to plans containing lien stripping "declaratory judgment-like" language, or (b) opposed motions to strip liens. The challege would be supported by the Bankruptcy Code and Bankruptcy Rules requiring that attempts to strip liens must be brought by way of adversary proceedings.

Mortgagees must avoid waiving the requirement that mortgage lien stripping can only occur through an adversary proceeding. Mortgagees must file affirmative pleadings with the court registering their objection to any attempt by debtors to strip liens by means other than through an adversary proceeding. The failure to demand that lien stripping actions be filed as an adversary proceeding could result in the required for adversary proceeding may be waived. See In re Forrest, 410 B.K. 816 (Bankr. N.D.IL 2009)(J. Schmetterer); and In re Pence, 905 F.2d 1107, 1108 (7th Cir. 1980).

In In re Forrest, 410 B.R. 816 (Bankr. N.D.IL 2009)(J. Schmetterer), the court reviewed a debtor’s attempt to strip-off and avoid a lien on a junior mortgage by inserting lien stripping language in the chapter 13 plan with the hope that the court would confirm the plan containing said language. The creditor objected asserting that a wholly unsecured second mortgage cannot be avoided via the plan confirmation process. Instead, the creditor asserted that lien stripping and avoiding can only be accomplished via an adversary proceeding.

The Forrest court presented the issue before it as whether a debtor may strip off a junior mortgage that is allegedly wholly unsecured through a chapter 13 plan, rather than through an adversary proceeding. Ultimately, the court held that the debtor may NOT strip off the junior mortgage through the chapter 13 plan because the Bankruptcy Code, Bankruptcy Rules, and the US Constitution require debtor to file an adversary proceeding to do so.

The court noted that chapter 13 plans normally provide extensive financial details. However, the court also noted that it is not common that plans include provisions in the nature of declaratory judgments that purport to adjudicate legal issues between parties if the plan is confirmed.

The Forrest court noted that the Seventh Circuit Court of Appeals rejected such an effort by a student loan debtor attempting to discharge student loan debt by a similar tactic in In re Hanson, 397 F.3d 482, 284 (7th Cir. 2005). The Seventh Circuit believed that the tactic of utilizing the plan to obtain a “declaratory judgment” was employed by debtor’s in the hope that an unsuspecting bankruptcy court would confirm the plan and thus bind the lender who failed to recognize the ploy in time to object to confirmation.

The Forrest court also believed that the Bankruptcy Code and Bankruptcy Rules require an adversary proceeding to strip off and avoid a lien. The court noted that Rule 7001 required an adversary proceeding to determine validity, priority, or extent of lien or other interest in property. The court believed the stripping and voiding of a wholly unsecured lien has the same result as declaring the lien void in an adversary proceeding--- namely, the entire claim is treated as an unsecured claim.

The court objected to debtor’s attempt to flaunt both substantive and procedural provision of the Bankruptcy Code and Rules through a meaningless incantation inserted into the proposed plan. In particular, the court focused on the heightened notice provisions set forth in the Code and Rules.

The court believed debtor’s failure to comply with the heightened notice provisions violated the US Constitution by depriving the junior mortgagee of life, liberty, or property, without due process of law. Therefore, the court held that where the Bankruptcy Code and Bankruptcy Rules require the debtor to prosecute an adversary proceeding, the debtor cannot instead include a provision in the Chapter 13 plan and expect it to bind the junior mortgagee.

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Inadequate Notice Defense

Junior mortgagees can contest any lien stripping order that was entered with inadequate notice. Mortgagees should argue that proper notice required adherence to the manner of notice that fully complies with the Bankruptcy Rules--- including notice being mailed to the junior mortgagee and directed to an officer or agent, plus notice being sent via certified mail.

A lien stripping confirmation order was challenged because of inadequate notice in In re Stassi, 20 CBN 236 (Bankr. C.D.IL 2009). There, the court granted the junior mortgagee's motion for relief from the confirmation order that contained language stripping the junior mortgagee's lien. The court held that debtors who propose a strip off of wholly unsecured liens as part of a Chapter 13 confirmation process are responsible for ensuring that the creditor whose lien is to be stripped receives notice of the plan provisions, related motions, and the dates set for objections and hearings in a manner which fully complies with the Bankruptcy Rules.

In Stassi, the Chapter 13 debtors said their home was worth $270,000 and subject to two mortgages both held by United Community Bank. The debtors said they owed UCB $341,721 on the two mortgages, with the junior mortgage being wholly unsecured. The debtors’ plan proposed to void the junior lien and treat that claim as unsecured. The debtors’ plan was confirmed without objection.

More than two months after the plan was confirmed, the junior mortgagee asked for relief on the basis that it did not receive notice of the filing of the case or of the debtors’ proposed plan. The mortgagee said it learned of the bankruptcy filing only after the debtors defaulted on the payment of the second mortgage.

The junior mortgagee said the debtors informed it of the bankruptcy in response to the lender’s inquiry about the missing payment. The junior mortgagee’s request for relief was filed less than one week after learning of the bankruptcy filing. The lender asserted its belief that the debtor’s home was worth $380,000 and that both of its mortgages were fully secured.

The court said its practice is to allow debtors to strip off wholly unsecured mortgages through plan confirmation provided that service of the plan is made in the same manner as service of an adversary complaint.

The docket in this case indicated that service of the debtors’ plan was made on the junior mortgagee by regular mail at a bank branch located in Chatham, IL. The service was made by the clerk of court through the Bankruptcy Noticing Center. The mailing to the junior mortgagee was not directed to any officer or agent and was not made by certified mail. Although the debtors objected to granting the relief requested by the junior mortgagee, they provided no evidence that the mortgagee was served in accordance with the Rules, the court said.

The court granted the junior mortgage’s request for relief and declared that "Where notice to the creditor is inadequate, secured property will still vest in the debtor upon confirmation as provided by Section 1327(b), but will remain subject to the unavoided lien rather than vesting 'free and clear' as permitted by Section 1327(c)."

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Equitable Powers Defense

A Pennsylvania bankruptcy court held that it did not have the discretion to ignore a debtor’s valid lien stripping action by exercising the court’s general equitable powers. In Korbe v. Department of Housing and Urban Development (In re Korbe), 18 CBN 741 (Bankr. W.D.Pa 2008), HUD held a third mortgage on debtor's homestead. Given that there was no equity in the debtor's residence above the first mortgage, the debtor sought an order stripping off HUD's lien.

The court said that there was no unique facts that would allow HUD to prevent the loss of its junior lien. The fact that the lien was secured by debtor's home did not change the outcome according to the court because Section 1322(b)(2)'s anti-modification provision does not apply to wholly unsecured junior mortgages.

HUD argued that the court had discretion to exercise its equitable powers as to the avoidance of HUD's lien, but the court disagreed. The court found that nothing in Section 506 of the Bankruptcy Code authorized the court to ignore a debtor’s valid lien stripping action in the name of equity. Indeed, equity follows the law and the United States Supreme court has declared that the bankruptcy courts’ equitable powers are to be exercised within the confines of the Bankruptcy Code.

While the facts of this case harmed the junior mortgagee's attempt to defend against the lien strip action, the court's holding may be helpful in future cases when the facts are reversed. This case revolved around a wholly unsecured junior mortgage. But, what if the facts showed that the mortgage was partially or negligibly secured --- say by a $1,000 or so.

First, a partially secured junior mortgagee would cerainly argue that the Supreme Court's decision in Nobelman controlled and prohibited the lien strip-down of any undersecured mortgages --- no matter how much of the lien was secured. Second, the Korbe case could also be cited in opposition to a debtor's argument that the court could utilize its equitable powers to strip a "barely" or "negligibly" secured junior mortgage. The argument would be that courts are not permitted to utilize their discretion and equitable powers to strip a negligibly secured junior mortgage --- since "equity follows the law" no matter the result.

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Legal Defense

The Seventh Circuit Court of Appeals has not addressed the issue of lien stripping wholly unsecured junior mortgages. Therefore, a junior mortgagee can still argue in good faith that the law prohibits lien stripping of junior mortgages, especially if your case is assigned to a judges that is more sympathetic to the anti-modification provisions of Section 1322(b)(2). However, at least five other circuit courts of appeals have held that debtors are able to strip the liens of wholly unsecured junior mortgages.

The minority view is that debtors cannot strip wholly unsecured junior mortgages, citing the Supreme Court's opinion in Nobelman v. American Savings Bank, 508 U.S. 324 (1993). These minority-view courts do not distinguish between stripping-down undersecured liens and stripping-off wholly unsecured liens. According to the minority view, the Nobelman case embraces the anti-modification provision of Section 1322(b)(2) and prohibits any stripping of any lien secured by a debtor's homestead.

An example of the minority view is In re Barnes, 207 B.R. 588 (Bankr. N.D.IL 1997)(J. Schmetterer). There, the debtor attempted to strip a wholly unsecured junior lien pursuant to Section 506(a) and avoid that lien pursuant to Section 506(d). The junior mortgagee objected. The Barnes court reviewed the interplay between the lien stripping provisions of Section 506(a) and the anti-modification provisions of Section 1322(b)(2). Then the court analyzed the Supreme Court's Nobelman interpretation of these provisions in a strip-down, undersecured context and its applicability in a strip-off, wholly unsecured context.

The Barnes court found no support in either Section 1322(b)(2) or the Supreme Court's Nobelman decision for debtor's attempt to strip off the junior mortgagee's security interest in debtor's principal residence. Accordingly, the court granted the junior mortgagee's motion to dismiss the adversary complaint.

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Post Foreclosure Default Defense

Mortgagees should argue that a wholly unsecured mortgage cannot be avoided by a bankruptcy court after a state court judge enters a default judgment in favor of the junior mortgagee in a state court foreclosure action. Mortgagee should assert that a bankruptcy court’s order to strip would be a violation of the Rooker-Feldman doctrine and would be outside of the court’s subject matter jurisdiction.

A court addressed a similar issue in Calabria v. CIT Consumer Group (In re Calabria), 20 CBN 212 (Bankr. W.D.Pa 2009). There, the court dismissed the debtors' complaint to strip-off a mortgage because it found that the court lacked subject matter jurisdiction to do so. The court found that the Rooker-Feldman doctrine precluded the bankruptcy court from considering whether a mortgage on the debtors’ home was invalid after a state court judgment of foreclosure had been granted on the mortgage.

The facts of the case showed that debtors executed two notes and mortgages on their principal home. The junior mortgage was assigned to a third party, which filed a foreclosure action against debtors after the debtors defaulted on the second loan. The junior mortgagee obtained a default judgment against debtors in the mortgage foreclosure case.

Shortly thereafter, debtors filed for Chapter 13 bankruptcy relief. Debtors petitioned the court to avoid the mortgagee’s junior lien because the recorded mortgage referenced the wrong address or contained no legal description. Debtors argued that state law required that a valid mortgage describe the property sufficiently to enable it to be located and identified. If the mortgage was invalid, there could be no foreclosure.

Nevertheless, the bankruptcy court rejected debtors’ argument stating that any ruling that the mortgage instrument was defective would be tantamount to the bankruptcy court concluding that the state court foreclosure judgment was “erroneously entered.” After all, the debtors’ complaint expressly requested that the bankruptcy court strike the junior mortgagee’s secured claim and issue an order to the state court requesting that the state court strike the judgment in the mortgage foreclosure case.

The bankruptcy court found that if it were to grant the requested relief, then it clearly would have the effect of negating the state court judgment. Under those circumstances, the bankruptcy court concluded that the affirmative claim asserted in debtors’ complaint was "inextricably intertwined" with the state court judgment rendered against debtors. So, the bankruptcy court found that debtors were requesting that the bankruptcy court do precisely what Rooker-Feldman prohibited: to undo the effect of the state court judgment. The bankruptcy court refused to do so and dismissed the case.

So, in the final analysis, junior mortgagees could cite the Calabria opinion for the proposition that bankruptcy court’s cannot strip wholly unsecured junior mortgages afer a state foreclosure court has already issued an order finding the junior mortgage lien as a valid, enforceable lien.

But, a clever debtor could attempt to distinguish Calabria on a factual basis, arguing that Calabria addressed the validity of the lien and not the value of the lien property. In a typical lien strip case, the validity of the second mortgage lien is not in question. The real question is the value of the lien property and whether the lien is wholly unsecured. So, a debtor could argue that the Rooker-Feldman doctrine in Calabria only emasculated the bankruptcy court’s power to address the validity of the lien, but did not affect the bankruptcy court’s power to value the lien property pursuant to Section 506(a).

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Vacating Order Upon Dismissal

Mortgagees must file a motion to vacate any order that avoided a junior mortgage lien whenever the underlying Chapter 13 case is dismissed or converted to Chapter 7. The support for such a motion should emanate from two sources: the order avoiding the lien; and Section 349(b)(1)(C).

Prior to the entry of the lien avoidance order, smart litigators would have requested that language be inserted into said order allowing for the order to be vacated in the event the underlying Chapter 13 case is dismissed or converted to Chapter 7. Such was the case in In re Waters, 276 B.R. 879, 888 (Bankr. N.D. IL 2002)(J. Squires), there the court added language in the "Conclusion" paragraph of the order avoiding the junior lien that said: "In the event the plan fails, the Debtor does not consummate the confirmed plan, and the case is dismissed, the junior mortgage holder’s lien shall be reinstated pursuant to 11 USC §349(b)(1)(C)."

After the dismissal or conversion, smart litigators should file a motion to vacate the lien avoidance order on the grounds (a) that the lien avoidance order specifically provided for the vacation in the event of dismissal or conversion, and (b) that Section 349(b)(1)(C) provides that "Unless the court, for cause, orders otherwise, a dismissal of a case … reinstates … any lien voided under section 506(d) of this title."

Such a position is supported by the court’s analysis in In re Chaudhry, 411 B.R. 282 (Bankr. E.D.Va 2009). In Chaudhry, the court distinguished between the effects of a case dismissal and the effects of a case being fully administered. The court noted that actions taken in a dismissed case may be undone, whereas actions taken in a fully administered case remain as ordered by the court. In particular, the Chaudhry court noted that liens avoided under §506(d) are reinstated if the case is later dismissed, whereas liens avoided in a fully administered case remain avoided at the conclusion of the case.

The motion to vacate should also request that the court hold that either (a) the lien was never avoided because the lien avoidance order was not EFFECTIVE until the completion of the plan, or (b) if the court finds the lien was avoided, then the lien is reinstated nunc pro tunc to the date the lien avoidance order was entered.

The court may object to a motion to vacate the lien avoidance order declaring that such an order is "unnecessary." Nevertheless, the litigator should demand such an order and call it a "comfort order," which is needed so that the junior mortgagee has a document that can be recorded with the county recorder. The recording of such a document would minimize any confusion that may exist among a title company, future buyer, or future lender as to the validity or seniority of the previously avoided lien. This would be especially true if a debtor had recorded the lien avoidance order previously.

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Dismissing Underlying Chapter 13 Case Defense

Junior mortgagees should attempt to cause the underlying Chapter 13 cases to be dismissed, both before and after confirmation. Upon dismissal, the order avoiding the junior lien could be vacated. Therefore, the mortgagees should explore the possible strategies to cause the dismissal and not sit passively waiting for the Chapter 13 standing trustee to act:

  • Section 521(e)(2)(C): mortgagees should make a timely request to a debtor for copies of the tax return/transcript for the most recent tax year ending immediately before the commencement of the case. If a debtor fails to comply on a timely basis, then the subsection states “the court SHALL dismiss the case…” (emphasis added).
  • Section 1307(c)(1): mortgagees should prosecute a motion to dismiss for “unreasonable delay” by the debtor that is prejudicial to creditors. The mortgagee should site debtor’s failure to get a plan confirmed within a reasonable time; failure to file required schedules or statements; etc.
  • Section 1307(c)(3): mortgagees should prosecute a motion to dismiss or convert for debtor’s failure to file a Chapter 13 plan on a timely basis.
  • Section 1307(c)(4): mortgagees should prosecute a motion to dismiss or convert for debtor’s failure to commence making timely plan payments.
  • Section 1307(c)(5): mortgagees should prosecute a motion to dismiss or convert if the court enters an order denying confirmation of a proposed plan or the denial of a debtor’s request for additional time for filing another plan.
  • Section 1307(c)(6): mortgagees should prosecute a motion to dismiss or convert if debtor fails to make plan payments or fails to take any other action that results in a “material default” with respect to a term of a confirmed plan.
  • Section 1307(c)(11): mortgagees should prosecute a motion to dismiss or convert if debtor fails to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.
  • Section 1307(e): mortgagees should prosecute a motion to dismiss or convert the case if debtor fails to file a tax return required under Section 1308. Section 1308 requires debtor to file all tax returns for all tax periods ending during the 4-year period ending on the petition date; said returns must be filed no later than the day before the original 341 meeting date, unless extended by the court.

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Settlement Terms

If the junior mortgagee decides to settle a lien stripping adversary complaint, then the mortgagee should demand that the following terms, among others, be included in the lien avoidance settlement order:

  • the order becomes effective only upon the entry of the discharge order pursuant to 11 U.S.C. Section 1328(a) and not pursuant to the Section 1328(b) hardship discharge;
  • the order may be vacated upon motion pursuant to the express terms of the lien avoidance order and pursuant to Section 349(b)(1)(C) at any time after the underlying chapter 13 case is dismissed or converted to another chapter;
  • the junior mortgagee is not required to tender any release of lien until the entry of the discharge order pursuant to 11 U.S.C. Section 1328(a);
  • the junior mortgage lender's lien shall be deemed in full force and effect until the entry of the discharge order pursuant to 11 U.S.C. Section 1328(a), and must be paid in full if the debtor sells the subject property, transfer title to the subject property, refinances senior mortgage(s) on the subject property, or modifies the senior mortgage(s) on the subject property at any time prior to the entry of the discharge order pursuant to 11 U.S.C. Section 1328(a);
  • the junior mortgage lender may file a motion for a re-valuation hearing pursuant to Section 506(a) in the event the junior mortgage lender believes the fair market value of debtor's primary residence increased prior to the entry of the discharge order; and the lien avoidance order shall be vacated if the re-valuation proves that the junior mortgage lien has become partially secured as a result of the increase in the value of debtor's principal residence; and
  • the junior mortgage lender may file a motion to vacate the lien avoidance order if the debtor's primary residence, that is the subject of the junior lien, failed to remain debtor's primary residence at any time prior to the entry of the discharge order pursuant to 11 U.S.C. Section 1328(a).

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Contact Us

Discuss Lien Stripping Defenses with an Experienced Bankruptcy Lawyer

I am attorney Robert Schaller and have been practicing law for over 24 years. I have represented clients in almost 2,000 bankruptcy cases. I am eager to represent you in your next lien stripping case.

Please contact me to schedule a conference by calling 630-655-1233 or submitting the contact form below.

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