Lien Can Be Stripped Even Though Non-Debtor Ex Liable for Debt

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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 dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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