DECISION AND ORDER
The issue in this bankruptcy appeal arises from a familiar scenario after the recent collapse of the housing market: whether a chapter 13 debtor can “strip-off’ a wholly unsecured secondary or junior lien on the debtor’s principal residence when the debtor is ineligible for discharge because of a prior chapter 7 discharge pursuant to 11 U.S.C. § 1328(f)(1) (no chapter 13 discharge if the debtor obtained a chapter 7 discharge within the past 4 years). The bankruptcy court (Hon. Pamela Pepper) said no, dismissing the *855 debtor’s adversary proceeding against GMAC Mortgage, LLC, the secondary mortgage holder.
Judge Pepper’s decision is part of a mounting split of authority among bankruptcy courts across the country.
In re Jarvis,
In October of 2004, the debtor-appellant purchased homestead real estate located at 3166 N. 50th Street, Milwaukee, Wisconsin. In February 2007, the debtor obtained a second mortgage on her home. Both mortgages are held by GMAC Mortgage. The fair market value of the property is $48,000.00. The balance on the first mortgage is $56,800.00; the balance on the second mortgage is $48,000.00. On March 29, 2010, the debtor received a chapter 7 discharge. The debtor filed for chapter 13 bankruptcy on April 29. In an adversary proceeding, the debtor asked the bankruptcy court to treat GMAC’s second mortgage as an unsecured claim and to “strip-off’ GMAC’s secondary lien rights on her property. GMAC filed a claim on the first mortgage, valuing its lien at $67,911.16. GMAC did not appear in the adversary proceeding, did not file a claim with respect to the second mortgage, and is not a party to this appeal.
Section 506(a) of the bankruptcy code deals with the situation, described above, when the lien amount exceeds the current value of the property:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property ... and is an unsecured claim to the extent that the value of such creditor’s interest ... is less than the amount of such allowed claim.
11 U.S.C. § 506(a). This section separates an undersecured creditor’s claim into two parts: a secured claim to the extent of the value of the collateral, and an unsecured claim for the balance of the claim. “The term ‘strip off is colloquially used when, there being no collateral for a mortgage, the entire lien is proposed to be avoided. The term ‘strip down’ is used when, there being insufficient collateral value for a mortgage, the lien is proposed to be reduced to the value of the collateral.”
In re Mann,
Section 506(d) provides that “[t]o the extent that a lien secures a claim against a debtor that is not an allowed secured claim, such a lien is void.” In
Dewsnup v. Timm,
In chapter 13, the debtor’s plan may “modify the rights of holders of secured claims,
other than a claim secured only by a security interest in real property that is the debtor’s principal residence,
or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims ...” § 1322(b)(2) (emphasis added). The Supreme Court interpreted § 1322(b)(2) to prohibit a homestead mortgage lien from being stripped down to the value of the collateral, reading the language “a claim secured only by a security interest in real property” as “referring to the lienholder’s entire claim, including both the secured and the unsecured components of the claim.”
Nobelman v. Am. Savings Bank,
All of which brings us to § 1328(f)(1), and the more narrow issue presented by this appeal. Enacted as part of the Bankruptcy Abuse Prevention and Consumer Prevention Act of 2005, § 1328(f)(1) prevents the court from granting “a discharge of all debts provided for in the plan or disallowed under section 502, if the debtor has received a discharge” in a “case filed under chapter 7, 11, or 12 of this title during the 4-year period preceding the date of the order for relief under this chapter.” Courts refer to a chapter 13 case filed on the heels of a chapter 7 case as a “chapter 20” or a “no-discharge chapter 13” case. The debtor does not dispute that § 1328(f)(1) prevents her from obtaining a discharge under chapter 13. Rather, the debtor argues that her ability to strip-off GMAC’s wholly unsecured junior lien does not depend upon her ability to obtain a discharge.
The lead case finding against chapter 20 lien stripping is
Jarvis,
which held that a “no-discharge Chapter 13 case may certainly be utilized to obtain the protections
*857
of the automatic stay for the purpose of proposing a plan to make payments on debts. A no-discharge Chapter 13 case may not, however, result in a permanent modification of a creditor’s rights where such modification has traditionally only been achieved through a discharge and where such modification is not binding if a case is dismissed or converted.”
None of the cases which refuse to allow lien stripping in a no-discharge chapter 13 case acknowledge or confront the plain language of § 1328(f)(1), which simply prohibits “a
discharge
of all debts provided for in the plan.” A bankruptcy discharge “extinguishes only one mode of enforcing a claim — namely, an action against the debtor
in personam
— while leaving intact another — namely, an action against the debtor
in rem.” Johnson v. Home State Bank,
Many of the cases which refuse to allow lien stripping in the absence of a discharge focus on § 1325(a)(5), but this section does not apply to unsecured claims.
Jarvis
at 605. One court held that a claim valued as unsecured pursuant to § 506(a) should still be considered a secured claim for chapter 13 purposes because “the claim that exists after the Debtors’ chapter 7 discharge is a secured claim.”
Gerardin
at 346. The problem with this analysis is that it underestimates the importance of § 506(a) in chapter 13.
Zimmer,
This is not to say that debtors enjoy an absolute right to strip off unsecured liens in a no-discharge chapter 13 case. Courts have an independent duty to determine whether chapter 13 proceedings are conducted in good faith. § 1325(a)(3), (7). Filing a chapter 13 case “solely for the purpose of the lien avoidance” suggests manipulation of the bankruptcy code and is evidence of bad faith.
Hill
at 184 (citing
Tran
at 238). The Court expresses no opinion on this issue, which should be explored by the bankruptcy court on remand.
In
re
Sidebottom,
IT IS HEREBY ORDERED THAT the
National Association of Consumer Bankruptcy Attorneys’ motion to file an amicus curiae brief [D. 4] is GRANTED.
IT IS FURTHER ORDERED THAT
the decision of the bankruptcy court is REVERSED, and this matter is REMANDED for further proceedings consistent with this opinion.
Notes
.
See also In re Mendoza,
No. 09-22395 HRT,
.
See also In re Frazier,
. The Eleventh Circuit subsequently questioned its holding in
Tanner,
but
Tanner
remains the law in that jurisdiction.
In re Dickerson,
. Some courts also rely upon § 349(b)(1)(C), which provides that dismissal of a bankruptcy case reinstates "any lien voided under section 506(d),” Jarvis at 604; Blosser, the presumption being that since the debtor is ineligible for discharge, dismissal is the only other option. As noted above, lien stripping in chapter 13 does not depend upon the operation of Section 506(d).