MEMORANDUM OPINION
I. INTRODUCTION
The Court has before it Richard Robert Dolinak and Kathleen McDonnell-Doli-
The issue before the Court is whether the Debtors in this chapter 13 proceeding, who are not eligible to receive a chapter 13 discharge by virtue of having received a chapter 7 discharge during the 4-year period preceding the petition date in this case, may still void a wholly unsecured junior mortgage on their residence. This is an issue of first impression in the District of New Hampshire, and appears to be an issue of first impression within the First Circuit as well.
This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334, 157(a), and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
II. FACTUAL BACKGROUND
The facts relevant to the Motion are not in dispute.
The Debtors are joint owners of a single family home located at 235 Curtis Farm Road, Wilton, New Hampshire (the “Property”). The Property is the Debtors’ primary residence.
The Property is encumbered by two mortgages: (1) a first mortgage (the “First Mortgage”) held by Homeward Residential (the “First Mortgage Holder”); and (2) a second mortgage (the “Second Mortgage”) executed in favor of Countrywide Home Loans, Inc., dated August 1, 2006, and assigned to Bank of America, N.A., and The Bank of New York Mellon f/k/a The Bank of New York, as Trustee for the Certificate Holders of CWEHQ, Inc. Home Equity Loan Asset Backed Certificates Series 2006-S8 (the “Second Mortgage Holder”) by instrument recorded July 18, 2012.
On December 10, 2009, the Debtors filed a voluntary petition (the “Prior Bankruptcy”) in this District under chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”). See Case No. 09-14834-JMD. Schedule J in the Prior Bankruptcy indicated that the Debtors had monthly net income of -$1,630.92, i.e., a monthly net loss. Schedule F in the Prior Bankruptcy indicated that the Debtors had $110,560.07 in unsecured debt. The Debtors later amended Schedule F to include an additional $11,585.91 in unsecured debt. The Debtors listed the claims of the predecessors-in-interest of the First Mortgage Holder and the Second Mortgage Holder on Schedule D in the Prior Bankruptcy. The Debtors did not reaffirm their obligations to the predecessors-in-interest of the First Mortgage Holder or the Second Mortgage Holder during the Prior Bankruptcy. On April 1, 2010, the Debtors received a discharge by order of the Court under § 727 of the Bankruptcy Code.
On January 31, 2012, after the conclusion of the Prior Bankruptcy, the Debtors and the First Mortgage Holder entered into a home affordable modification agreement (the “HAMP Agreement”). Under the HAMP Agreement, the principal balance due under the lien to the First Mortgage Holder was $249,304.11. As of September 4, 2012, according to a statement the First Mortgage Holder Transmitted to the Debtors, the balance due was $247,611.16.
On October 10, 2012, the Second Mortgage Holder provided the Debtors with notice of its intent to conduct a foreclosure
On October 18, 2012, the Debtors obtained a market analysis from a realtor, which they submitted along with the Motion. According to the market analysis, the value of the Property, as of October 18, 2012, was between $185,000 and $190,000. For the purposes of the Motion, the Debtors accept that the Property has a value of $190,000. Accordingly, the balance due under the First Mortgage, as modified, exceeds the value of the Property by $57,611.16.
On November 16, 2012, the Debtors commenced the present chapter 13 case. According to the Debtors, they filed the case to protect the Property from foreclosure by the Second Mortgage Holder. Schedule J in the present case indicates that the Debtors have a positive monthly net income of $142.67. Schedule F in the present case indicates that the Debtors have $7,691.04 in unsecured debt. The Debtors’ chapter 13 plan dated November 16, 2012, proposes to make 36 monthly payments of $150.00. The plan will also pay any non-exempt proceeds from a currently pending lawsuit the Debtors are pursuing, in an amount sufficient to pay all allowed prepetition unsecured claims and all administrative claims in full. Although the plan estimates that it will pay unsecured creditors in full, the Second Mortgage Holder will receive no payments because the underlying obligation of the Debtors was discharged in the Prior Bankruptcy.
On December 21, 2012, the Debtors filed the Motion, which requests the entire lien in favor of the Second Mortgage Holder be determined to be unsecured and void in its entirety, subject to the Debtors’ compliance with the terms of their chapter 13 plan..
On December . 31, 2012, the Second Mortgage Holder filed a proof of claim in the case, stating that it held a secured claim in the amount of $46,441.32 secured by its mortgage lien against the Property.
III. DISCUSSION
To determine how the Debtors may treat the Second Mortgage Holder’s claim and lien, the Court must determine the nature of the Second Mortgage Holder’s claim and what treatment of any such claim is permitted under chapter 13. The Court will first look to §§ 502 and 506 of the Bankruptcy Code to determine the nature of the Second Mortgage Holder’s claim. The Court will then look to § 1322(b) of the Bankruptcy Code to determine whether the Debtors may void the Second Mortgage Holder’s lien through their plan.
A. Allowance of Claims or Interests Under § 502
Section 502(a) states, in relevant part, “[a] claim or interest, proof of which is filed under section 501 ... is deemed allowed, unless a party in interest ... objects.” 11 U.S.C. § 502(a). While the Debtors discharged their in personam liability to the Second Mortgage Holder in their Prior Bankruptcy, the Second Mortgage Holder maintained its in rem rights against the Property. See 11 U.S.C. § 524(a)(2). The Second Mortgage Holder timely filed a proof of claim listing a claim secured by the Property. See Court’s Claims Register, Claim No. 1. No party has objected to that claim. Under the Bankruptcy Uode, a “claim against the debtor” includes claims against property of the debtor. 11 U.S.C. § 102(2). Accordingly, the Second Mortgage Holder holds an allowed claim.
B. Determination of Secured Status Under § 506
Section 506(a)(1) states, in relevant part, “[a]n allowed claim of a creditor se
In Nobelman v. American Savings Bank,
In determining the same issue before the Court in this case, the Fourth Circuit Court of Appeals reaffirmed that “a claim’s status as secured or unsecured depends on the value of the collateral.” Branigan v. Davis (In re Davis),
The undisputed evidentiary record in this case establishes that the Property has no value in excess of the First Mortgage. In fact, the balance of the First Mortgage well exceeds the value of the Property. Accordingly, the Second Mortgage Holder’s claim is not secured, in whole or in part, because the Second Mortgage Holder is “out of the money.”
After the discharge in the Prior Bankruptcy, the Second Mortgage Holder retained its in rem rights against the Property, which included its lien and the right to foreclose
C. Treatment of the Second Mortgage Holder’s Claim and Lien in the Chapter 13 Plan
Section 1322(b) governs what a chapter 13 plan may do. Subsection (b)(2)
Under Nobelman and Mann, § 1322(b)(2)’s protection from modification does not apply to a wholly unsecured junior lien-holder, regardless of whether the lien is on the debtor’s principal residence. As discussed above, a wholly unsecured junior lien-holder holds only an unsecured claim in a bankruptcy case. Accordingly, in this district (and in most others), a debtor may avoid, or “strip-off,” wholly unsecured junior liens by completing a chapter 13 plan. Mann,
D. Lien Stripping in Chapter 20 Cases
When a debtor files a chapter 7 case, receives a discharge, and subsequently files a chapter 13 case, the process is colloquially referred to as a “chapter 20.” See Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, Ith Edition, § 179. 1, at ¶ 13, Sec. Rev. June 15, 2004, www.Chl3online.com. When a debtor has received a discharge in a prior chapter 7 case filed within the four-year period preceding the petition date of the subsequent chapter 13 case, the Bankruptcy Code bars a court from granting the debtor a discharge in the chapter 13 case. 11 U.S.C. § 1328(f)(1).
Courts are split over whether a chapter 20 debtor who is ineligible to receive a discharge in his or her chapter 13 may nonetheless avoid a wholly unsecured junior lien without paying the underlying in rem liability in full. As the Bankruptcy Court in In re Jennings,
In the first approach courts hold that chapter 20 lien stripping is impermissible because it amounts to a de facto discharge. These courts rely on Dewsn-up2 and Congress’s inclusion of a discharge requirement in section 1325(a)(5), and treat the wholly underwater second mortgagee as a holder of a secured claim. Courts that adopt the second approach permit chapter 20 lien stripping; however after plan consummation, without a discharge, the parties’ pre-bankruptcy rights are reinstated. These courts contend that discharge is the mechanism that voids the hen and that chapter 20 plans end in dismissal. The courts utilizing the third approach allow chapter 20 lien stripping because nothing in the Bankruptcy Code prevents it. These courts contend that the mechanism that voids the lien is plan completion and that chapter 20 cases end in administrative closing, (internal citations omitted)
Adopting the first approach, the court in Lindskog v. M & I Bank (In re Lindskog),
Courts that adopt the first approach often reason further that § 1325(a)(5)(B)(i)(I) prohibits lien stripping in the absence of a discharge. Linds-kog,
Some courts that adopt the first approach also find that the Supreme Court’s ruling in Dewsnup v. Timm,
The first conclusion is well-taken. Section 506, by itself, does not allow a party to strip down or strip off a lien. Only operative sections, such as § 1322, can be used
Finally, the Court notes that Dewsnup involved chapter 7 debtors seeking to “avoid” a partially unsecured lien on real property, using only the provisions of §§ 502 and 506, and is thus of limited guidance in the context of chapter 13, which contains specific provisions allowing debtors to strip down or strip off liens. Accordingly, this Court shall not follow the first approach.
Courts that adopt the second approach reason that, while a chapter 20 debtor may propose and confirm a plan that strips off a wholly unsecured second mortgage, the hen is reinstated when, after the completion of the plan, the court dismisses the case
This Court joins those courts that adopt the third approach. As discussed above, “nothing in the Bankruptcy Code conditions a Chapter 13 debtor’s ability to modify a wholly unsecured creditor’s lien under § 1322(b) on his eligibility for a discharge.” Fisette,
In a chapter 20 case, lien avoidance becomes permanent when the debtor successfully completes all payments under a confirmed plan, and the case is closed. In re Okosisi,
E. Good Faith Requirement.
While the Court has determined that a chapter 20 debtor may strip off a wholly unsecured lien, the Debtors must, as any chapter 13 debtor must, be able to show that their chapter 13 plan was proposed in good faith. 11 U.S.C. § 1325(a)(3). This is a separate requirement in the confirmation of all chapter 13 plans, and the circumstances of a chapter 20 case warrant a careful inquiry by the Court. In the First Circuit, courts use a totality of the circumstances approach to investigate good faith under § 1325. Berliner v. Pappalardo (In re Puffer),
Based upon the Debtors’ uncontested offer of proof, this Court finds the following circumstances of this case relevant to a determination of good faith:
1. Stripping a Lien is Not the Debtors’ Sole Reason for Proposing their Plan
At least one bankruptcy court has suggested that a chapter 13 plan proposed solely for the purposes of stripping a lien is an indication of bad faith. In re Tran,
The proximity in time between the Debtors’ chapter 7 and chapter 13 cases is another factor relevant to a determination of good faith. See Keach v. Boyajian (In re Keach),
Another factor relevant to good faith is whether a debtor seeks to accomplish in a chapter 20 what would not have been possible in either chapter 7 or chapter 13 standing alone. Id. Here, the Debtors could have stripped off the Second Mortgage lien in their Prior Bankruptcy, had it been a chapter 13. However, with no disposable income at the time of the Prior Bankruptcy, chapter 13 was not a valid option for the Debtors.
3. The Benefit to the Debtors is Not Unfair Relative to the Treatment of Creditors
Chapter 13 is, at base, a bargain between debtors and creditors. In re Klaven,
Accordingly, the Court finds that the totality of the circumstances of this case support a finding of good faith. The Court is careful to note the circumstances that allow a chapter 20 debtor to strip off a wholly unsecured second mortgage lien are narrow. However, this Court will not prevent an honest debtor from accomplishing what the plain language of the Bankruptcy Code allows based on the threat of future abuse. See Mann,
IV. CONCLUSION
For the foregoing reasons, this Court finds that the Debtors, who are not eligible to receive a chapter 13 discharge by virtue of having received a chapter 7 discharge during the 4-year period preceding their petition date, may still void the wholly unsecured Second Mortgage. The Court further finds that the Debtors have proposed their chapter 13 plan in good faith. The avoidance of the Second Mortgage lien will become permanent if and when the Debtors successfully complete all pay
This opinion constitutes the Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue separate orders, consistent with this opinion, granting the Motion and confirming the Debtors’ chapter 13 plan.
Notes
. In other words, the discharge extinguished the Second Mortgage Holder’s rights under the note. The Second Mortgage itself "rode through.”
. Dewsnup v. Timm,
. Subsection (5) states:
(5) with respect to each allowed secured claim provided for by the plan—
(A) the holder of such claim has accepted the plan;
(B) (i) the plan provides that—
(I) the holder of such claim retain the lien securing such claim until the earlier of—
(aa) the payment of the underlying debt determined under nonbankruptcy law; or (bb) discharge under section 1328; and
(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and
(iii) if—
(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and
(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or
(C)the debtor surrenders the property securing such claim to such holder.
. This was, perhaps, the core ruling in Dewsn-up: a chapter 7 debtor cannot strip down or strip off a lien by "using” § 506(d). However, a chapter 13 debtor may strip off a lien by completing a plan that complies with § 1322.
. To the extent courts that adopt the second approach look to § 1325(a)(5)(B)(i)(I) for the requirement that a discharge enter before a lien can. be avoided, this issue has been addressed above.
.The subsection actually refers to "any lien avoided under section 506(d) ...” However, as discussed above, Dewsnup states that liens are not avoided under that section. It is thus unclear what the subsection refers to, if anything, after Dewsnup.
. By virtue of the Prior Bankruptcy, the Second Mortgage Holder is not entitled to recover from the Debtors in the present case.