459 B.R. 200
Bankr. D.N.J.2011Background
- Chapter 7 debtor Gloster filed Sept 30, 2010; no-asset Chapter 7 with discharge obtained; residence valued at $182,000 encumbered by Chase first mortgage and BOA second mortgage plus BOA judgment lien; four months later, Gloster filed Chapter 13 with residence valued identically and total secured claims around $258,209; plan proposes to cure first mortgage arrears ($18,000) and strip off the wholly unsecured BOA second lien and judgment lien; Chase and IRS filed proofs of claim, BOA filed none; plan modified to address arrears and Chase interest-rate reduction; Chapter 13 Trustee objects to confirmation on grounds of ineligibility for discharge and bad-faith filing.
- Chapter 7 discharge does not bar Chapter 13 lien stripping in a Chapter 20 case under applicable law.
- The court assumes valuation and treatment justify stripping of BOA liens as wholly unsecured; plan also cures first mortgage arrears and provides for distribution to unsecured creditors.
- Debtor certified circumstances supporting Chapter 13 filing, including post-petition income changes and debt burden; court analyzes good faith and confirms plan.
- Court distinguishes lien stripping in Chapter 20 from discharge eligibility, finding statute allows stripping when plan is completed despite ineligibility for discharge.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Chapter 20 lien stripping is permissible when debtor is ineligible for Chapter 13 discharge | Trustee contends discharge ineligibility bars stripping | Gloster argues § 506/1322 allow stripping of wholly unsecured liens in Chapter 20 | Yes; lien stripping permitted in Chapter 20 if good faith and plan completion occur. |
| Whether § 1325(a)(5) precludes lien avoidance in a post-BAPCPA Chapter 20 case | Trustee argues plan cannot modify liens without discharge | Gloster contends § 1325(a)(5) does not require discharge for lien modification in Chapter 20 | No; § 1325(a)(5) does not condition stripping on discharge in Chapter 20. |
| Whether the plan is proposed in good faith, justifying confirmation | Trustee questions timing, purpose, and use of Chapter 20 to strip liens | Debtor argues relief goals (arrearage cure, lien-stripping, equity) and financial changes show good faith | Yes; plan filed in good faith given circumstances and anticipated income, with legitimate rehabilitative purpose. |
| Whether the valuation and classification of BOA lien as wholly unsecured is supported | Trustee objections to valuation and risk of improper strip | Valuation deemed reasonable given incomplete construction and market decline; liens are wholly unsecured after 506(a) | Yes; valuation and 506(a) result support wholly unsecured status enabling stripping. |
Key Cases Cited
- Johnson v. Home State Bank, 501 U.S. 78 (U.S. 1991) (established that dischargeable in personam liability leads to in rem claim treated under Chapter 13.)
- Nobelman v. American Savings Bank, 508 U.S. 324 (U.S. 1993) (holding that wholly unsecured mortgage lien may be stripped in Chapter 13 despite antibanks/2nd lien rules.)
- In re McDonald, 205 F.3d 606 (3d Cir. 2000) (Third Circuit held that wholly unsecured liens on principal residence may be stripped.)
- In re Hill, 440 B.R. 176 (Bankr. S.D. Cal. 2010) (rejected discharge-bar theory post-BAPCPA for lien stripping in Chapter 20.)
- In re Okosisi, 451 B.R. 90 (Bankr. D. Nev. 2011) (recognizes Chapter 20 lien stripping may proceed on good faith basis.)
- In re Tran, 431 B.R. 235 (Bankr. D. Nev. 2010) (supports that plan completion, not discharge eligibility, controls lien modification; cites statutory interpretation of 1325/506.)
- In re Fisette, 455 B.R. 177 (Bankr. Eighth Cir. BAP 2011) (example of lien-stripping in Chapter 20 context.)