Ch. 13 Debtor Only Partially Able to Strip Liens From Home

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By Daniel Gill

June 3 — A Chapter 13 debtor was allowed to avoid some but not all judicial liens which he alleged impaired his homestead exemption on a property he co-owned with a non-debtor ( In re Powers, 2016 BL 175727, Bankr. E.D.N.C., No. 14-06943-5-SWG, 6/2/16 ).

Judge Stephani W. Humrickhouse granted in part and denied in part a Chapter 13 debtor's motions to avoid three judicial liens as impairing the debtor's claimed exemption on his residence co-owned with his ex-wife.

The court rejected the minority line of cases that calls for a literal interpretation of Section 522(f) of the U.S. Bankruptcy Code and instead followed the majority of courts which take a different approach to calculate lien impairment when the property subject to the lien is owned by both a debtor and non-debtor.

Claiming the Homestead Exemption

On Dec. 1, 2014, James Cross Powers filed a Chapter 13 petition. Chapter 13 bankruptcy allows individuals with regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.

As part of his bankruptcy filing, the debtor claimed an exemption in his residence in North Carolina, which he held together with his ex-wife as tenants in common. The state, which has opted out of the federal exemption scheme, provides that debtors may exempt up to $35,000 in their principal residence. In other words, in North Carolina neither unsecured creditors nor a trustee in bankruptcy can reach up to $35,000 of a debtor's equity in his or her principal residence.

Section 522(f) of the Bankruptcy Code (11 U.S.C. §522(f)) allows a debtor to obtain an order disallowing judicial liens (created by courts to secure monetary judgments) to the extent that those liens “impair” an allowed exemption. The debtor filed motions to avoid three different judicial liens which otherwise would attach to his property interests.

Court Split in Calculating Impairment

Ordinarily it is relatively simple to calculate whether and to what extent a lien might impair a debtor's exemption in property. The court explained that 11 U.S.C. §522(f)(2)(A) was drafted by Congress to aid this analysis. The section provides that such liens impair the exemption to the extent that the sum of the subject liens and all other liens against the property (including consensual liens, like mortgages), plus the amount of the exemption, exceeds the value of the debtor's interests in the property if there were no liens to consider.

However, the court said, the formula does “not resolve impairment calculation in circumstances where a judgment lien attaches to the undivided interest of a single owner of jointly owned property.”

A minority of courts apply the Section 522(f)(2)(A) formula strictly and literally, such as Zeigler Eng'g Sales, Inc. v Cozad (In re Cozad) , 208 B.R. 495 (B.A.P. 10th Cir. 1997), cited by the court. But the problem with a strict, literal interpretation is that it “often avoids more liens than necessary to ensure the debtor retains the maximum available exemption,” the court said, citing All Points Capital Corp. v. Meyer (In re Meyer), 373 B.R. 84 (B.A.P. 9th Cir. 2007).

The majority of courts considering the issue (including the First, Third, Ninth and Eleventh Circuits) agreed that “a strict approach is at odds with the statutory purpose of §522,” the court explained, because it could frequently award the debtor a windfall by avoiding more liens than the debtor could if only the debtor held title.

The reason for the disparity, the court said, is that if the property were jointly owned, the value of the debtor's interest in the property would be only a partial interest of the value of the whole property.

Because the full mortgage would be subtracted from the debtor's proportionate interest (as contrasted from the entirety of the property), the equity to which the liens might attach would necessarily be smaller.

Comparing ‘Common Sense' and ‘Proration' Approaches

The majority courts applying a non-literal interpretation of Section 522(f) employ either the “common sense approach” or the “proration approach,” the court explained. In her order, Judge Humrickhouse demonstrated the functional differences of these methodologies by providing a calculation of one of the liens using both methods as well as one using the literal approach followed by the minority jurisdictions.

In the proration approach, instead of adding all the liens against the property as a whole, the court would calculate how much of the mortgage would be attributable to the debtor's share of the jointly held property (rather than subtracting the entire mortgage from the debtor's fractional interest). The proportionate interest of the mortgages would be added with the liens attaching solely to the debtor's interests to calculate the debtor's equity for the impairment analysis.

A similar approach is the “common sense approach,” which the court said “involves a simpler calculation and produces the same outcome” as the proration method. Under the common sense approach, the mortgages are deducted from the full value of the property and what's left is divided to show what the debtor's equity in the property would be absent any judicial liens. Then the debtor's claim of exemption is subtracted, with the result being the amount of equity available to which judicial liens might attach (in other words, “the non-exempt portion of debtor's remaining equity in the property”).

The judicial lien-holders can retain their liens against this amount, and such amount that went beyond that sum therefore impaired the debtor's exemption claim, and liens up to that amount could be disallowed.

The court said that instead of calculating impairment, “the common sense approach calculates the amount of liens that are not avoidable.”

Choosing the Non-Literal Interpretation

The court decided that under either the proration method or common sense approach, the result was the same, so the court did not rule that one of the two non-literal methodologies would control. But certainly the literal and non-literal approaches had different results. The court said that under the literal interpretation of the rule, all three liens would be avoided, even though some of the liens “simply do not impair” the debtor's $35,000 exemption.

According to the court's analysis, the literal interpretation of the Code would result in the debtor receiving a windfall of more than $20,000 of equity that under the other methodologies would be subject to the liens while still preserving the debtor's exemption. The court sided with the non-literal courts to find that such a windfall (i.e., that the debtor could preserve more equity than the maximum amount of the exemption) was not what Congress or the North Carolina legislature intended when passing Section 522(f) and related exemption regulations.

Accordingly, the court ordered that upon confirmation of the Chapter 13 plan, those liens that cut into the $35,000 exemption amount would be avoided to that extent. To the extent that the liens did not yet reach that amount, they would remain in full force and effect.

The result was that two of the liens would not be avoided. The third lien was allowed to stand in the dollar amount that was left before it reached the exemption amount; to the extent that the lien impaired the exemption it was avoided.

The debtor was represented by Travis Sasser, Cary N.C. The lien-holders did not object to the motions to avoid their liens and did not appear.

Correction: This version corrects an error in the second to last paragraph to indicate that none of the liens was avoided in its entirety.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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