Another Jurisdiction Allows Lien Stripping After Chapter 7 Discharge

by Alan C. Hochheiser, Esq.

The United States District Court for the Eastern District of California In Re Frazier has turned the tides on the split decisions in the Eastern District of California pertaining to the ability of a Debtor to strip second mortgages that have no value in a Chapter 13 proceeding after the Debtor has obtained a discharge in a Chapter 7 proceeding.  The District Court’s holding becomes another case in the Country where there is split authority whether the Debtor has the ability to strip a lien under these circumstances.  The Courts rational is that the ability to strip the lien is not based upon the Debtor’s lack of ability to obtain a discharge in the Chapter 13 due to the prior Chapter 7 discharge, but rather, is based upon the Debtor’s completion of all the requirements in a Chapter 13 case. 

As authority continues to be split around the Country, the chances of this case being brought to the Supreme Court seem very plausible.  In addition, we believe that we will see an increase in the Chapter 13 filings in the Eastern District of California after the Debtor has already obtained a discharge in a Chapter 7 case.  Chapter 20’s will once again be a proactive measure by Debtors in those Bankruptcy Courts. 

When faced with a situation where the Debtor is attempting to strip a lien in a Chapter 13 proceeding where the underlying obligation was previously discharged in a Chapter 7, it is crucial that the following steps be taken.  Confirm the value on the property by obtaining an appraisal.  Verify the outstanding balance on any mortgages ahead of the mortgage to be stripped to ensure that the amounts set forth by the Debtor are truly the amounts owed.  Finding $1.00 of equity will allow your mortgage to survive and be paid in full.  In addition, it may be time to determine whether the Chapter 13 proceeding was filed in good faith or solely for the purpose of stripping the second mortgage.  The status of the first mortgage on the property will play a large role. 

Weltman Weinberg and Reis Co., L.P.A. will continue to the monitor the case log throughout the Country as it pertains to the ability to strip a lien after the Debtor has obtained a Chapter 7 discharge.  Unfortunately, Chapter 20 proceedings may be alive and kicking once again. 

If you have any questions on this matter, please contact Alan C. Hochheiser, Managing Partner of the Bankruptcy Group at Weltman, Weinberg & Reis Co., LPA. Al can be reached at 216.739.5649 and ahochheiser@weltman.com.

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