Lien Stripping Bankruptcy Court Trial Between Homeowner & 2nd Mortgage Lienholder A Battle Of "Dueling Appraisers"

A recent bankruptcy court case decided in Northern California provides an illustration of how a trial involving an attempt by a homeowner/debtor to free her home from the encumbrance of a 2nd mortgage lien boils down simply to whether her appraiser's valuation of the home is more persuasive than the one obtained by the 2nd mortgage holder.

In this case, the total debt owed by the homeowner/debtor on her 1st mortgage and unpaid real estate taxes was $550,000. In addition, her home was encumbered by a 2nd mortgage lien which, under current law, can be avoided if she can prove that the loan secured by it is completely underwater. In other words, if the home is worth less than $550,000 (the balance owed on the 1st mortgage and unpaid taxes - ie. the debt having priority over the 2nd mortgage), the 2nd mortgage would be completely underwater and thereby, subject to the bankruptcy law's lien stripping rules. (In that case, the lien would be voided from the home and the outstanding balance owed on the debt secured thereby would be treated as an unsecured debt, which could then be either entirely or partially wiped out, or discharged, by the judge in a Chapter 13 bankruptcy proceeding).

Conversely, if the home is worth anything more than $550,000, the 2nd mortgage would not be completely underwater. In that case, the homeowner would be unable to relieve her home from the lien of that mortgage (which means that any court-approved plan to pay creditors in a Chapter 13 proceeding would have to satisfy the 2nd mortgage in full).

In this case, not surprisingly, the homeowner obtained a $525,000 appraisal for the home while the 2nd mortgage lienholder had it valued for $590,000. Interestingly, the bankruptcy judge rejected the valuations reached by both appraisals; however, he considered the factors addressed in each one to reach his own determination as to what the home was worth.

For the judge's conclusion on the value of the home, and his ruling on whether the 2nd mortgage should be stripped from the debtor's home, see In re Alizotis (Memorandum Decision On Motion To Value And Avoid Lien), Case No. 09-33061DM, (USBC, N.D. Cal., January 20, 2010).