A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...
By Daniel Gill
Sept. 28 — Can a Chapter 13 debtor strip a junior lien from her residence after her ex-husband—and co-obligor on the secured note—deeds his interest in the house to her after filing bankruptcy? A New Jersey bankruptcy court, finding very little guidance in existing case-law on the subject, says “yes” ( In re Mensah-Narh , 2016 BL 314813, Bankr. D.N.J., No. 15-33385 (CMG), 9/23/16 ).
Judge Christine M. Gravelle of the U.S. Bankruptcy Court for the District of New Jersey on Sept. 23 held that even though the non-debtor ex-husband remained liable for the obligation once secured by the junior mortgage, the debtor ex-wife became the sole owner of the property. The debtor could avail herself of the Bankruptcy Code sections which allow her to wipe out wholly unsecured liens against her residence.
The court’s ruling answered only that threshold question—whether it is possible for the debtor to strip the lien—and further proceedings will be necessary to determine whether there is or isn’t any equity in the home to which the junior lien could attach.
When Sussie Mensah-Narh filed for bankruptcy relief under Chapter 13 on Dec. 15, 2015, she and her ex-husband were both on the title to her residence, the court said. Chapter 13 allows individuals receiving 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.
Sometime after the bankruptcy case was filed, the debtor’s ex-husband granted her a quitclaim deed, transferring all his interest in the residence to the debtor. The debtor then sought to confirm a plan that stripped the junior lien-holder’s lien and treated its claim as a general unsecured claim, which would be paid at the same percentage rate as the debtor’s other unsecured creditors.
Although Bankruptcy Code Section 1322(b)(2) prohibits a Chapter 13 debtor from modifying a debt secured by her residence, that section does not apply to a lien that is “wholly unsecured.” As the court explained, “In the Third Circuit, a junior mortgage may be crammed down, or ‘stripped,’ only if the value of the principal residence is less than the amount due to a senior mortgage holder, leaving no remaining value for the junior mortgage.”
The bank mortgagee objected to the proposed plan, arguing that the lien could not be stripped because the non-debtor ex-husband remained liable for the underlying obligation. The judge disagreed.
The court noted that “property of the bankruptcy estate” includes property acquired post-petition, or after the case is filed. Since the debtor owned the entire property, she could strip the lien (provided the value of the house was less than the amount of the senior lien). The ex-husband’s liability under the erstwhile secured note would continue as his unsecured debt, the court suggested.
To contact the reporter on this story: Daniel Gill in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)