August 19, 2009
California Bankruptcy Judge Rules that Completely Unsecured Secured Debt is Unsecured for Chapter 13 Eligibility Purposes
In re Smith, --- B.R. ---, 2009 WL ------------ (unpublished to date)(Bankr. C.D. Cal. Aug. 2009, Tighe. J.)
Issue: Is secured debt which is entirely unsecured because of the value of the collateral, treated as secured or unsecured for chapter 13 eligibility purposes?
Holding: Completely unsecured secured debt is unsecured for chapter 13 eligibility purposes.
This opinion rules on three similar cases. In each, the debtors filed Lam motions which were granted (one was by stipulation). If the debt covered by the Lam motion is added to the total unsecured debt, the debtors were well over the chapter 13 limits in Section 109(e). Lam motions apply usually to junior mortgages which are completed underwater. A Lam motion which is granted permits a chapter 13 plan to treat the debt as unsecured in the plan and extinguishes the lien at the end of the plan.
Judge Tighe first dealt with the issue of whether the “undersecured debt is ‘liquidated.’” The argument is that it is unknown on the filing date whether the Lam motion will be granted. Judge Tighe responded that usually the Lam motion requires only a simple hearing and that makes the debt liquidated.
Judge Tighe next dealt with Scovis, 249 F.3d 975, 981 (9th Cir. 2001) which required a judgment lien avoided under Section 522(f) to be treated as unsecured for eligibilty purposes. The debtors argued that Scovis does not apply because the undersecured lien there was a judgment lien, not a consensual lien. But Tighe said that if the chapter 13 is dismissed, the judgment lien comes back, same as Lam motions.
The debtors also argued that even after the Lam motion is granted, the debt is secured, at least until the discharge is entered. Tighe said that 506(a) says the debt is unsecured and 506(d) says that the lien is void “for bankruptcy purposes.”
Next Tighe dealt with the issue that 1322(b)(2) prevents the debtor from modifying loans when the collateral is the debtor’s residence. She writes, debtors “wish to extend the limitation placed on modifying a partially secured trust deed to wholly unsecured junior liens on the primary residence.” She acknowledges that there is a “problem with applying Scovis and Soderlund to debtor’s primary residence indebtedness.” She concludes, “In order to avoid treating a lien one way for confirmation and another for eligibility, and to treat the partially secured senior trust deeds consistent with Nobleman and Zimmer, any lien which is partially secured on debtor’s primary residence will be treated as a secured debt for §109(e) purposes as well.”
Judge Tighe invited appeals at the end of the ruling and said she would consider stays pending appeal. She also said she would consider certifying the matter for direct appeal.
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Great post. This was a long time in the making, and your briefing and getting the word out is appreciated. At least we have some clarity on the issue now.
Posted by: Hale Andrew Antico | Aug 19, 2009 5:40:56 PM
Great Blog! Thanks for getting the word out..
Posted by: Debt help TN | Nov 7, 2009 1:47:36 PM
Thanks for the claification. Isn't it unusual for a judge to invite appeals?
Posted by: Debt Help CA | Nov 14, 2009 7:44:28 AM
What about a LAM motion by ONE owner of a property when the other owner is not in bankruptcy? Can LAM relief be ordered in that situation?
Posted by: Spike | Dec 18, 2009 12:02:14 PM
Responding to Spike: Where one owner files Chapter 13 and succeeds in obtaining a LAM lien strip order, and goes on to get a Ch 13 discharge, thus completing the requirements for the lien strip, upon recording a certified copy of the LAM Order and a certified copy of the Discharge, the lien is "stripped off" of the property. The non-filing owner, however, remains liable on the balance then remaining due on the now, "unsecured" note.
Posted by: B-Man | Mar 23, 2010 8:36:24 AM
The difference between a secured debt and unsecured debt is important in knowing what your bankruptcy may and may not wipe out. Secured debt is debt where you have put up some type of collateral. If you don't pay the debt, the financing company can come and take the collateral. Unsecured debt are debts like credit cards. If you don't pay there is no collateral for them to come and get. Instead, they may try to sue you to recover the debt...
Posted by: scoremore | Nov 3, 2010 5:52:39 AM
Great information..this is only for chapter 13 and what about chapter 7? As most of the people are trying to use chapter 7 bankruptcy.
Posted by: Bob | Feb 14, 2011 2:27:05 AM
This is an interesting blog site that always has something nice to offer through its posts.Keep posting similar interesting posts on your site.Thanks for sharing.
Posted by: chapter 13 california qualification | Jun 8, 2011 4:52:56 AM
Very good information. It's important to try and stay current when it comes to bankruptcy... The bankruptcy code is very complex and it could seriously affect your case.
Posted by: Kevin Porter | Jul 5, 2011 10:42:34 AM
this is the main reason why it's important to lien strip loans where the secured value is less than the loan amount.
Posted by: Charlotte Bankruptcy Attorney | Sep 18, 2011 10:18:39 AM