By Ryan C. Wood
One of the most valuable tools of filing a Chapter 13 bankruptcy case is the ability to strip off a wholly unsecured junior lien from your real property. It does not matter whether it is for your primary residence or an investment property. The relevant factor is the value of the property. If the value of your property is worth less than your first mortgage, then junior mortgages and liens are unsecured and the liens may be stripped off in your Chapter 13 bankruptcy case. The liens have to be completely unsecured in order to be stripped off. If even a small portion of the lien is secured by some value it will not be stripped. Here is an example: First mortgage is $300,000, second mortgage is $100,000, judgment lien of $20,000. If the house is worth $250,000, the second mortgage and judgment lien may be stripped. If the house is worth $401,000, none of the liens may be stripped.
Obviously the ability to strip off unsecured junior liens from the property would help a lot of homeowners if this is available to them. The fair market value of the house is the biggest element in determining whether you can strip off the junior liens from the property. Your bankruptcy attorney may require you to obtain an appraisal of your home before filing the bankruptcy case. In order to strip off the junior liens from the property you need to file a motion (or adversary proceeding depending on the jurisdiction in which you filed your bankruptcy case) with the court to value the property. If the property valued is less than the first mortgage then you will be able to strip off the junior liens. So how does the court value the property? The valuation of the property is determined on a case by case basis.
If there is a huge difference between the home value and the first mortgage (for example, if the house is worth $200,000 and the first mortgage is $300,000) there will most likely not be a debate. However, if the value of the property is fairly close to the amount owed on the first mortgage there may be a debate on both sides as to the value of the property. The junior lien holders will of course allege that the value of the property is higher than the first mortgage and you and your bankruptcy attorney will argue that the value of the property is lower than the first mortgage. The judge will take a look at both sides and base his decision on what evidence is in front of him to determine the value (for example, is the valuation of the property coming from an appraiser. If there was an appraiser, how many years experience does he have in the field, and what area is he most familiar with).
One very important issue when looking at the value of the property is the date of the valuation. The judge would most likely place more weight on an appraisal that was more recent in time than another appraisal. But what exactly is the date that the judges look at to determine the value of the property? This is especially important because the value of property can fluctuate significantly in a short amount of time. Is it the date the petition was filed? The date the motion to value hearing is held? The date that the Chapter 13 plan is confirmed? The date may impact the ability to strip the junior liens especially if property values are on the rise. If the property increased in value to an amount that is higher than the first mortgage after the date the petition was filed and the judge believes that the value of the property should be taken at the time of the motion to value hearing, then the lien strip could be dead in the water. Unfortunately, the Ninth Circuit does not shed any light on what date should be used. Each case is looked at on a case by case basis with the judges look at what the purpose of the valuation is.