When someone owes multiple mortgages on a property, even where the property is residential property, it is worth considering whether a Chapter 13 bankruptcy might provide that person the ability to strip off a junior mortgage lien. This requires evaluating whether the property value is insufficient to secure the junior mortgage(s). A debtor in a Chapter 13 proceeding may strip off a junior mortgage lien when the debt owed on a senior mortgage lien exceeds the value of the collateral. The gross value of the property without deduction for hypothetical costs of sale or other deductions must exceed the amount owed to the senior position lien holder. For lien stripping of a residential mortgage relief to be available, there cannot be a dollar in equity for the junior mortgage to attach to so that the junior position mortgage is wholly unsecured.
When a Chapter 13 debtor has stripped a junior mortgage lien, a claim for a stripped off mortgage is treated as an unsecured obligation to be repaid per the terms of a Chapter 13 plan along with similar unsecured claims such as medical debt or credit card claims (sometimes repaid at 0% if that is what the Chapter 13 plan provides to unsecured creditors). The Courts have ruled that even a Chapter 13 debtor who may not be eligible for a Chapter 13 discharge due to a prior filed discharged bankruptcy within relevant time periods may utilize Chapter 13 for lien stripping of a wholly unsecured mortgage if other eligibility and requirements of plan confirmation are met.
However, no such junior mortgage relief is available to a debtor in a Chapter 7 case because the Supreme Court in Caulkett has confirmed that Dewsnup v. Timm does not permit lien stripping in a Chapter 7 bankruptcy. But, Dewsnup is inapplicable to Chapter 13, according to In re Enewally, 368.F.3d 1165, 1170 (9th Cir. 2004). Lien stripping is permitted in Chapter 13 and the operative authority includes 11 USC §1322(b)(2), Nobelman v. American Savings Bank, 508 U.S. 324 (1993), In re Zimmer, 313 F.3d 1220 (9th Cir., 2002), and In re Lam 211 B.R. 36 (9th Cir BAP, 1997). Therefore, Chapter 13 bankruptcies can provide a valuable tool to some individuals which will allow them the ability to retain their property without being saddled long-term with a junior mortgage on a property that lacks value to secure that junior mortgage.
A successful Chapter 13 plan allows a Debtor to reinstate a delinquent mortgage as if no default had occurred. The Chapter 13 Trustee will verify the status of a mortgage as reinstated before the completion of a plan. When a Chapter 13 debtor receives a discharge, a permanent injunction against collection on amounts addressed through the Chapter 13 plan goes into place. The willful failure of a creditor to have properly credited payments received under a confirmed Chapter 13 plan where there has been no default by a Debtor constitutes a violation of the discharge injunction if such action causes material injury to a Debtor. A party who knowingly violates a discharge order can be held in contempt and sanctions awarded. The Ninth Circuit has applied a two-part test for a Debtor to prove in determining whether sanctions are justified: (1) the creditor knew the discharge injunction was applicable and (2) the creditor intended the actions which violated the injunction.
As to the first prong, the Court must find actual knowledge in the context of contempt before a finding of willfulness can be made. Meaning, the Court must find evidence that the creditor was aware of the discharge injunction and that it applied to its claim. As to the second prong concerning a party’s intent, the focus is not on a party’s belief or intent, but on determination of whether a party’s conduct complied with the order at issue. If the Court finds a party has willfully violated the discharge injunction to a Debtor’s detriment, the Court may award compensatory damages, punitive damages, and attorney’s fees to the Debtor. Therefore, a Chapter 13 Debtor has protection to know once a delinquent mortgage has been cured through a confirmed Chapter 13 plan, that a Debtor is absolutely entitled to a fresh start going forward.