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.

《楊清泉律師專欄》CONTENTS OF LIEN STRIP JUDGMENT IN CHAPTER 13(Part II)