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10-C-1128 In re Fair

By: WISCONSIN LAW JOURNAL STAFF//April 20, 2011//

10-C-1128 In re Fair

By: WISCONSIN LAW JOURNAL STAFF//April 20, 2011//

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Bankruptcy
Unsecured liens; strip-off

A wholly unsecured junior lien on the principal residence of a debtor can be stripped-off in chapter 13 despite the operation of 11 U.S.C. 1328(f)(1).

“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 *3. The problem with this analysis is that it underestimates the importance of § 506(a) in chapter 13. Zimmer, 313 F.3d at 1227 (‘emphasis on the valuation process’ of § 506(a) is ‘compelled by Nobelman and the statutory scheme’). As noted above, lien stripping is allowed in chapter 13, and many of chapter 13’s pre-discharge provisions expressly rely upon the distinction between secured and unsecured claims. § 1322(b)(2) (chapter 13 plan may modify the rights of holders of secured or unsecured claims); § 1325(a)(4) (value of property to be distributed on account of each allowed unsecured claim); § 1325(a)(5) (requirements for modification of allowed secured claims). Therefore, while the claims which survive chapter 7 could properly be characterized as ‘secured’ claims, that characterization is subject to change once a chapter 13 petition is filed. ‘If it is correct to “look[] to § 506(a) for a judicial valuation of the collateral to determine the status of the bank’s secured claim,” then it stands to reason that valuation will control the determination of the mortgagee’s security interest – i.e., whether it is a secured or unsecured claim.’ Bartee, 212 F.3d at 290. GMAC’s junior mortgage lien is unsecured, and there is nothing in the bankruptcy code which ties the modification of an unsecured lien to obtaining a discharge under chapter 13. Tran at 235; Hill at 183.”

Reversed and Remanded.

10-C-1128 In re Fair

E.D.Wis., Randa, J.

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