Bankuptcy Update - Lien Stripping

Services for Real Estate Pros with Law Offices of Louis J. Esbin

A recent published decision by the Bankruptcy Appellate Panel for the Ninth Circuit affirmed a lower court decision that sends Chapter 13 Debtors out into the cold.  In this decision (in which I represented the debtor trying to save their home) the BAP held that on the date of filing the Debtor knows with certainty that as a result of a "lien strip" they will have more than the amount allowed to file for relief under Chapter 13.

Now, when the wholly unsecured second mortgage is added to the other unsecured debt (credit cards, student loans, taxes, other claims, etc.), if the amount exceeds the $380,990 limit, a person or couple will not qualify for relief under Chapter 13.  Their alternative, if they want to save their home and must be relieved of all other debt, is to file for relief under the more costly and burdensome Chapter 11.

Remember, for those of you who are seeing "short sale" stars, if a short sale comes before a bankruptcy, and as a result their is no secured debt to reduce the Means Test income, the post short sale debt may not qualify for relief under Chapter 7, because they fail the Means Test.  So, as if things were not complicated enough before yesterday, they have just gotten more complicated.  Closing on a short sale without the client actually having sought bankruptcy advice (beyond just giving them the CAR (or equivalent) standard disclosure) should be discouraged.

We are one of the few boutique bankruptcy firms that specializes in Individual Chapter 11 cases, obtaining for our clients the results of relief from debt, stripping of the second lien, and negotiating loan modifications as part of the reorganization process.  These cases are done efficiently, effectively, and within reason as compared to others and the relief from debt obtained.

Comments (3)

Janet Sebile
Coldwell Banker Apex, Realtors - Rowlett, TX

Thanks for this information.  I have taken short sale classes from someone who used to work with the banks in loss mitt.  This person said that if the seller was in or going to file for bankruptcy that it is best not to do even consider a short sale because the banks won't work you. 

I actually had a short sale that I found out after (seller held back on info) listing that it was in bankruptcy and this was my experience.  The bank just let the file sit and now they are actually trying to work with the seller to keep the house.

Jul 09, 2010 05:27 AM
Louis Esbin
Law Offices of Louis J. Esbin - Santa Clarita, CA

If the seller is a higher wage earner, whose Annualized Monthly Income under the Means Test exceeds the Median Income for their area, under the Bankruptcy Code they may deduct the contractually due amounts to reduce their Current Monthly Income and, therefore, pass the Means Test.  If, however, they sell their home in a Short Sale first, and there is a deficiency from the sale or they have other debt that can be discharged in bankruptcy, because they now "fail" the Means Test, they may not qualify for relief under Chapter 7.  The result, therefore, is that the seller has had no monetary benefit from the Short Sale (only a promise of a better credit score), but now is faced with a 5 year commitment period to discharge debt that could have been discharged after 120 days after filing of a Chapter 7.

Now, I ask, what is in the best interest of the client?  As I see, bankruptcy filed first, followed by a Short Sale in which neither lender can ask for anything more from the seller.  Delayed commission gratification, but preservation of the client's interest.  Of course, the bank does not agree, because they want to preserve their deficiency and tax benefits.

Jul 09, 2010 05:46 AM
Dan Edward Phillips
Dan Edward Phillips - Eureka, CA
Realtor and Broker/Owner

Louis, Thank you for the excellent poost on Lien Stripping!

Jul 17, 2010 07:27 AM