How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask socrateaser Your Own Question
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 38910
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
Type Your Bankruptcy Law Question Here...
socrateaser is online now
A new question is answered every 9 seconds

Socrateaser, Hope all is well with you. Heres my question. A,

Resolved Question:

Socrateaser, Hope all is well with you. Here’s my question.

A, debtor who is a natural person, successfully stripped off a wholly unsecured 2nd lien on said debtor’s primary residence through a Chapter 11 filing. The case was confirmed 1 year prior, and actually filed 2 years prior from the current date. The case is concluded and the final decree has been issued by the court. The court ordered that said wholly unsecured stripped 2nd lien on debtor’s primary residence be extinguished, as the 2nd mortgage lien holder filed no proof of claim during the Chapter 11 bankruptcy proceeding. No payment is to made to that creditor. However, the court ordered that the debtor not receive a discharge for any stripped-down secured or unsecured debts, which were included in the plan until all unsecured creditors which did file timely proofs of claim, in the Chapter 11 filing are paid. Debtor was unable to modify the first mortgage on debtor’s primary residence during Chapter 11 filing because of the Chapter 11 exclusion from a debtor being able to modify the first mortgage on an owner occupied property. However, the automatic stay was still in effect during bankruptcy proceeding and interest continued to accumulate on the first mortgage and no payments were made to the lender.

Debtor is still in arrears for payments on first mortgage of the owner occupied property and is concerned that foreclosure action will begin soon no that the case has concluded and the automatic stay in no longer in effect. Debtor wishes to find a way to modify the first mortgage through a lien stripping by way of a separate Chapter 11 filing in the following manner. Debtor wishes to vest primary residence into one of Debtor’s LLCs, which was formed in a state other than that which the debtor’s primiary residence is located. Debtor is the primary and sole member of said LLC. Debtor then wishes to rent out primary residence to a bonafide third party, and then debtor wishes to file for Chapter 11 bankruptcy protection in the district of the state in which the LLC was formed. Debtor then wishes to attempt to lien strip the first mortgage down to the market value of the property, as property is currently encumbered 25% over market value by the 1st mortgage. Debtor (as LLC) then wishes to propose a Chapter 11 plan to pay off the unsecured portion of the first mortgage as a percentage pursuant to a new Chapter 11 plan. Providing that the LLC’s debt obligations meet the current Chapter 11 requirements, is there some other statute, rule, law or regulation which, would prevent debtor from taking such a plan of action or prevent the LLC (as debtor) from enacting such a plan?

Also, besides a new Chapter 11 filing might there be any other way allowed by the bankruptcy code in another form of bankruptcy for the debtor to modify the first mortgage as an LLC or as a natural person?

Also, if debtor re-opened prior Chapter 11 case, could the debtor list the prior primary residence as investment property provided that it were rented out and then attempt to lien strip the re-opended Chapter 11 case?

Thank you.
Submitted: 6 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 6 years ago.
Debtor will fail to accomplish his/her goal, because the bankruptcy code expressly prohibits a cramdown of the debtor's principal residence. This issue has been litigated "every which way but loose." Transferring the property to a new entity will have no effect, because the existing deed of trust has priority over any transfer. Cramdown is prohibted under the Code, and where a loan was originally made with the understanding of the lender that it was made as a loan on a principal residence, a later change of character of property use to a rental does not change the character of the underlying loan -- because if it could, then everyone would wait until the last instant before bankruptcy, rent out their property, and then be able to avoid the law that prohibits a cramdown on a principal residence. This would effectively nullify the statutory prohibition, the question has been litigated already and the courts are unanimous that it will not be permitted.

Sorry, but if debtor cannot pay the 1st mortgage, then the lender can foreclose and there is no way to stop it from occurring.

Hope this helps.

NOTICE: My goal here is to educate others about the law. I am always available to answering your follow-up questions after you click Accept – however, if you do not click Accept, the website gets paid, and I receive nothing. This is true, even if you are on a subscription plan. So please click Accept, so that I will be able to continue to provide this service for others in the future.

socrateaser and other Bankruptcy Law Specialists are ready to help you
Customer: replied 6 years ago.
Socrateaser, thank you for this reply. A note, not in counter to your reply, but just seeking more clarification, because debtor has a sfr residence property which was crammed down (interest rate reduction, delay of payments) in said Chapter 11 confirmation plan. Debtor took out 1st trust deed loan as owner occupied and lived there for some years and and then rented it out in good faith years before Chapter 11 filing or closing of Chapter 11 case. Lender expressed no objection to plan, nor did court. How might it have been that this first trust deed was able to be modified (crammed down)?
Expert:  socrateaser replied 6 years ago.
The law is found in Bankr. Code 1123(b)(5), which prohibits modification of "...a claim secured only by a security interest in real property that is the debtor’s principal residence...."

There is case law showing that a Chapter 11 Debtor could strip a lien on multi-unit property where one unit was Debtor's principal residence and Creditor's security interest extended to other income-producing units. Lomas Mortg., Inc. v. Louis (1st Cir. 1996) 82 F.3d 1, 3-7; but see In re Lee (9th Cir. BAP 1997) 215 B.R. 22, 24-26--ban on lienstripping applies where additional items covered by lender's lien are nothing more than a "component part" of debtor's residence and of little independent value.

Bottom line: I don't know how your alleged cramdown occurred, because it's not legally possible.

Hope this helps.

Customer: replied 6 years ago.
Socrateaser, thanks for reviewing and answering my following up question. Much appreciated as always!
Expert:  socrateaser replied 6 years ago.
You're welcome, as always.