COURTS DIVIDED OVER HOME VALUE DATES FOR JUNIOR LIEN STRIP PLANS IN CHAPTER 13

（ PART 1 ）

Homeowners like the idea of getting rid of the second trust deed on their residence in a bankruptcy. The second trust deed could be a home equity loan or home improvement loan taken when the value of the house was high. In Chapter 13, junior trust deeds such as these can be cancelled or avoided if there is no equity whatsoever supporting the trust deed. Bankruptcy courts require a motion to avoid junior lien (MTA), or an adversarial complaint to be prosecuted to get rid of the lien. Either way, the law requires that the lien be completely unsecured. When home values are down, creditors do not oppose the MTA. However, when home values are up, creditors may disagree and dispute the value of the house. They need to prove that there is at least $1 of equity supporting their lien.

Home values have been increasing in most parts of the country. California is no exception. In Southern California, many areas have experienced a 20% increase in value in the last 12 months. In fact, some Chapter 7 debtors who filed their cases in the second half of 2013 encountered problems with trustees who argue that a portion of the equity of their houses are no longer exempt because current home values have gone up. Some trustees are aggressive in wanting to sell debtor’s residence in Chapter 7 where there is a significant difference in the home value claimed by debtor, and the current value claimed by trustee.

In some parts of the country, home value appreciation becomes a problem in a Chapter 13 lien strip situation because the value of the home at the date of filing of the petition is less than the value of the home at the date of the confirmation of the Chapter 13 plan. The dispute between debtor and creditor is the exact date when the value of the home comes into play legally. For instance, debtor states that his house is worth $500,000 on the date he files his Chapter 13. He owes $540,000 on his first mortgage. He has a second trust deed for a home improvement loan of $100,000 that he plans to strip or cancel. He uses an appraisal report dated near the time of his filing date that confirms the value of his house at $500,000 which he uses to support his motion to avoid lien. The confirmation hearing is 6 months from the date of filing. He files his motion to avoid lien (MTA) on the third month post-filing. The hearing is set for the fourth month. Creditor opposes his MTA arguing that the value of the house has increased to $580,000; therefore, there is $40,000 of equity supporting the home improvement loan of $100,000. The valuation date for purposes of stripping the lien becomes relevant. If the value date is the date of filing, debtor will win and the MTA will be granted and the lien cancelled. If the value date is the confirmation date which is still a month away, then creditor will win and the MTA will be denied, therefore, the home improvement loan of $100,000 will still exist as a secured debt on the residence.

COURTS DIVIDED OVER HOME VALUE DATES FOR JUNIOR LIEN STRIP PLANS IN CHAPTER 13（ PART 2 ）