Monday, September 12, 2011
Stripping of Unsecured Mortgage Without Discharge In Chapter 13
A recent Federal Appeals Court ruling in re: Fisette, No. 11-6012 (8th Cir. BAP Aug. 29, 2011) ruled that an unsecured junior mortgage can be stripped off in a Chapter 13 bankruptcy. In the case at hand, the debtors filed a Chapter 7 bankruptcy and received a discharge of their unsecured debts. The mortgages on the home were not reaffirmed. Thereafter, they filed a Chapter 13 bankruptcy (this is known among bankruptcy practitioners as a Chapter 20 bankruptcy). Because of the timing of the filing of the Chapter 13, the debtors were not eligible for discharge in the Chapter 13, however this would allow them to catch up on their mortgage payments. Within the Chapter 13 Plan, the debtors proposed to strip off the 2nd and 3rd mortgages that were totally unsecured; that is to say, the value of the house was less than the balance of the first mortgage. This was proposed pursuant to section 506(a) and 1322(b)(2).
The Federal appellant court agreed that these two sections of the bankruptcy code should be read together, and rejected the idea that the stripping of the mortgages would only be applicable upon discharge. I believe this case provides the first Federal Appellant decision regarding the stripping of an unsecured lien on real property without a Chapter 13 discharge.