Add One More Bankster Left Holding The Bag With Underwater 2nd Mortgage In Another Chapter 13 'Strip-Off'
- In Chapter 13 bankruptcy cases, debtors and unsecured creditors have the ability to strip-off wholly unsecured liens pursuant to 11 U.S.C. 506(d).
By example, in the recent case of In re Smith, Case No. 6:12-02333-ABB in the Bankruptcy Court in and for the Middle District of Florida, the Court granted the debtor's motion to strip-off a creditor's second mortgage of approximately $400,000.00 where two parcels of real property were valued at $111,000.00 and a first mortgage of $215,000.00 encumbered the parcels. The Smith Court found that the creditor's second lien was wholly unsecured and accordingly, void and subject to strip-off pursuant to 11 U.S.C. 506(d).
This decision shows the importance of considering a property's value and potential real property value fluctuations prior to a creditor taking a second mortgage on non-homestead property owned by an individual. Failure to have at least $1.00 of equity at the time of a Chapter 13 bankruptcy filing could result in a creditor's entire lien being voided.(1)
For the ruling, see In re Smith, Case No. 6:12-02333-ABB (M.D. Fla. January 31, 2013).
(1) From the court's ruling:
- "Section 506(a) defines the secured and unsecured components of debts according to the value of the underlying collateral." Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357, 1358 (11th Cir. 2000). Where a lien is "wholly unsecured" it is subject to "stripoff" pursuant to 11 U.S.C. Section 506(d). In re Tanner, 217 F.3d at 1360. A wholly unsecured lien claim is void. 11 U.S.C. § 506(d); In re Sadala, 294 B.R. 180, 185 (Bankr. M.D. Fla. 2003).
The combined value of the vacant lot and Trojan Ave. property ($111,000.00) is exceeded by the $215,000.00 security interest the holder of the Johnson mortgage has in these real properties. Zaslavsky's subordinate lien is wholly unsecured. 11 U.S.C. § 506(a)(1). No equity exists in the vacant lot and Trojan Ave. property to support Zaslavsky's second-priority lien. The lien attaches to no collateral.
Zaslavsky's lien on the vacant lot and Trojan Ave. property is void and may be stripped off pursuant to 11 U.S.C. Section 506(d). In re Tanner, 217 F.3d at 1360. The extinguishment of the lien is not effective until the Debtor receives a discharge pursuant to 11 U.S.C. Section 1328(f) because a mortgage lien cannot be modified or stripped off without a Chapter 13 discharge. In re Sadala, 294 B.R. at 185; In re Gerardin, 447 B.R. 342, 349 (Bankr. S.D. Fla. 2011) (en banc).