CONTENTS OF LIEN STRIP JUDGMENT IN CHAPTER 13

Now that house values are way down, many homeowners are able to get rid of their 2nd trust deeds in a Chapter 13 bankruptcy. The process of removing the 2nd and junior trust deeds is called a LAM motion, the seminal case of in Re Lam where the 9th Circuit Court of Appeals first confirmed the validity of stripping a 2nd trust deed on a chapter 13 debtor’s residence in 1997, a lien strip motion, or an adversarial complaint to avoid junior lien on principal residence. Some Chapter 13 debtors are able to maximize benefits using the LAM motion when the balance of the 2nd trust deed is significant and the plan payment is small.

 Recently, client was able to get rid of $120,000 of 2nd trust deed while paying only a monthly Chapter 13 plan payment of $303 for 60 months which pays off the $120,000 2nd trust deed that has been converted to unsecured debt by adversarial complaint and $80,000 of credit card debt! This is a sweet deal because debtor is able to get rid of $120,000 of 2nd trust deed and $80,000 of credit card debt for a total payment of $18,180 over a period of 60 months. The actual savings to debtor is more than $400,000 on the 2nd trust deed because that trust deed should have been paid at the rate of $1,200 a month for 30 years or a total of $432,000. The relief provided debtor is awesome, the bigger the balance the more advantage.

What are the contents of the order of judgment stripping the 2nd trust deed? For the last 13 years, lawyers and judges crafted their own orders and judgments to ensure that the conditions of the law were complied with. Two years ago, a proposed form of the order and judgment was circulated by the bankruptcy court to lawyers for comments, and a final uniform order and judgment form came out last year. The contents of the order and judgment stripping a junior lien are as follows:

1. The fair market value of the residence is stated at no more than “X” amount. This value is the fair market value of the residence on the day the bankruptcy was filed. There must be evidentiary support for this value. It is best to include an appraisal report to support the value. The balance of the first trust deed must exceed the fair market value of the house. For instance, if the value of the house is $100,000, the balance of the first trust deed must be more than $100,000.

2. Creditor defendant’s claim related to the junior lien shall be allowed as a non-priority general unsecured claim in the amount per the filed Proof of Claim. This means that the 2nd trust deed, a debt secured by the residence, has been converted into an unsecured debt, no longer secured by anything. In other words, the 2nd trust deed has been converted into something like a credit card debt by court order.

3. Avoidance of defendant’s junior lien is contingent upon debtor’s completion of the chapter 13 plan and the debtor’s receipt of a chapter 13 discharge.

4. Defendant shall retain its lien in the junior position for the full amount due under the corresponding note and lien in the event of either the dismissal of debtor’s chapter 13 case, the conversion of debtor’s chapter case to any other chapter under the bankruptcy code, if debtor completes the chapter 13 plan but does not receive a discharge, or if the property is sold or refinanced prior to debtor’s receipt of the chapter 13 discharge.

5. In the event that the holder of the first position lien of any senior lien on the property forecloses on its interest and extinguishes defendant’s lien rights prior to debtor’s completion of the chapter 13 plan and receipt of a chapter 13 discharge, defendant’s lien shall attach to the proceeds greater than necessary to pay the senior lien, if any, from the foreclosure sale.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty+ years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin & Fujien and looks forward to discussing your case with you personally. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.