By Kitty J. Lin
Bankruptcy courts allow you to strip your junior mortgages in a Chapter 13 bankruptcy case if your creditor is holding a claim that has no value. See In re Zimmer, 313 F.3d 1220 (9th Cir. 2002). An example is if your house is worth $300,000. Your first mortgage is $400,000 and your second mortgage is $100,000. You can strip your second mortgage in a Chapter 13 bankruptcy case in this scenario. What happens if that is the only reason why you are filing for bankruptcy? You do not reorganize a car loan and do not have significant credit debts to discharge. Would it be considered bad faith to file a Chapter 13 case if you do not have any other debts to discharge? The Ninth Circuit Bankruptcy Appellate Panel answered this question in Meyer v. Lepe (In re: Lepe), Bankruptcy Case Number: 10-60264 (May 9, 2012).
In Meyer v. Lepe, Lepe filed his Chapter 13 bankruptcy case to strip the second mortgage on his house. He only had $549 worth of unsecured debt in addition to the unsecured debt from his second mortgage. The Chapter 13 Trustee objected and said that filing a bankruptcy case when the sole purpose is to strip the second mortgage is considered to be lacking in good faith. The Trustee argued that Lepe was balance sheet solvent and detailed mistakes in Lepe’s bankruptcy petition. The Bankruptcy Court attributed the mistakes to Lepe’s bankruptcy lawyers inadvertence rather than lack of good faith. The Ninth Circuit Bankruptcy Appellate Panel disagreed with the Trustee’s arguments and said that one must look to the totality of the circumstances when looking to see if a plan is filed in good faith. Each case should be looked at on a case-by-case basis. There are many different factors to look at and not one single factor should be looked at in isolation even if one of the factors indicates bad faith. All of the circumstances need to be looked at as a whole. The court also indicated that it is not considered bad faith if you are proposing a Chapter 13 plan that is using what is available to you in the Bankruptcy Code.
So even if you are filing for bankruptcy protection to strip a second mortgage and you have no other significant unsecured debts it is possible to have your Chapter 13 bankruptcy plan confirmed. The courts will look at your case to see if you are sincere in seeking Chapter 13 bankruptcy relief, to see if you lied in your petition about any of your assets or debts, your ability to pay into a Chapter 13 plan based on your income and expenses, and other factors. If you are seeking to have your second mortgage stripped in a Chapter 13 plan it is advisable to seek the advice of a bankruptcy attorney in your jurisdiction.