In the Chapter 13 bankruptcy case of debtors who owned a property which had two mortgages on it, the bankruptcy court ruled that the second lien (mortgage) be made unsecured. Let’s take a look at a chronology of events in this Chapter 13 bankruptcy.
- The Plaintiffs filed a voluntary petition under Chapter 13 of the Bankruptcy Code on October 4, 2010.
- At the time Plaintiffs filed their bankruptcy petition the Subject Property had a fair market value of $130,000.00.
- The Plaintiffs interest in the Subject Property is subject to a first lien, and purchase money mortgage executed on November 4, 2004 and recorded on November 19, 2004 in the County of Cook and is for the amount of $144,000.00.
- The claim of Defendant arises out of a mortgage (“Jr. Lien”) executed on November 4, 2004 in the original amount of $36,000.00, recorded on November 19, 2004 in the County of Cook, document number 0432446047. This Jr. Lien is purported to be secured by the Subject Property.
- The current Chapter 13 Plan (“Plan”) provides that Plaintiffs will make monthly payments to the Chapter 13 Trustee in the amount of $910.00 per month.
- Under the Plan, general unsecured creditors will be paid a dividend often percent (10%) of their allowed claims.
- No evidence has been presented to challenge the validity of the secured claim that holds priority over the Jr. Lien.
- No evidence has been presented to challenge the fair market value of $130,000.00.
- The secured claim of Chase in the amount of $151,488.53 exhausts the value and equity in Plaintiffs’ residence.
- There is no value and equity to support the Jr. Lien claim of the Defendant.
- The Plaintiffs have currently scheduled the first mortgage claim in the amount of $140,914.00, and the Defendant’s Jr. Lien claim in the amount of $35,086.00.
- The value of Plaintiffs residence is $130,000.00
As there is no value or equity to support the second priority lien of Defendant, that claim is not secured at all by a security interest in the Debtors’ residence, as the term is used in § 1322(b) of the Bankruptcy Code. The Chapter 13 plan may value the collateral under F.R.Bankr.P. 3012, and determine the respective rights of secured creditors through the language used therein, contingent on confirmation thereof, completion of the Plan by the Debtor, and entry of the discharge. In re Meyer, 2009 B 20268, Docket Entry 69 (Bankr. N.F.Ill. January 29, 2010). Following completion of the Plan and entry of Debtors’ discharge, Defendant will release its second lien within 28 days.
As noted in #8, the home’s value had not been challenged by the mortgage lender. If it had been successfully challenged and the value of the home covered the second lien it would have remained a secured debt. Point #6 is important, because it indicates that the second mortgage lender probably won’t receive more than ten percent of the debt over the course of the Chapter 13 bankruptcy plan.