§ 80.4     Timing Issues: Lien Waiver, Surrender or Avoidance
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 80.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The protection from modification in § 1322(b)(2) is limited that the creditor’s security interest must encumber only real property that is the debtor’s principal residence.1 This section and the next2 address whether changes in the nature or use of collateral over time affect whether a lien is secured only by real property that is the debtor’s residence. Timing issues with respect to valuation are discussed elsewhere.3

[2]

It is not uncommon at the time of making a real estate loan for the creditor to also take a security interest in other property—real or personal—that is not the debtor’s principal residence. For example, a creditor might have a mortgage on the debtor’s homestead and a security interest in the debtor’s appliances and furniture. When a Chapter 13 case erupts, it has occurred to some creditors to sanitize their collateral to come within the protection from modification in § 1322(b)(2) by waiving or abandoning any disqualifying security interests. Also, postpetition events such as lien avoidance4 or relief from the stay to foreclose sometimes change the composition of a creditor’s collateral.

[3]

The general rule seems to be that a creditor’s entitlement to the protection from modification in § 1322(b)(2) cannot be created or destroyed by events occurring after the petition. For example, a creditor holding a security interest in personal property and the debtor’s principal residence was not entitled to the protection from modification in § 1322(b)(2) when the creditor waived the security interest in personal property after the Chapter 13 petition.5 A mortgage holder with a perfected security interest in the debtor’s escrow payments for taxes and insurance cannot manufacture protection from modification under § 1322(b)(2) by releasing the escrow portion of its security interest after the Chapter 13 petition.6 A creditor with a security interest in two 80-acre parcels of real estate and a second home is not protected from modification by § 1322(b)(2) notwithstanding that the debtor proposes in the plan to surrender all collateral other than the residence.7 Neither the lender nor the debtor can create protection under § 1322(b)(2) by waiving interests in collateral if at the petition, the lender has security other than the debtor’s principal residence.

[4]

That relief from the stay is granted after the petition to permit a mortgage holder to foreclose on all its collateral other than the debtor’s homestead does not trigger the protection from modification in § 1322(b)(2) because at the petition the mortgage holder was secured by real property other than the debtor’s principal residence.8 That the debtor avoids a creditor’s lien on the collateral other than the principal residence or that the lien on that other property is valueless is not outcome determinative; if at the petition the creditor had a security interest in property other than the principal residence, the protection from modification in § 1322(b)(2) cannot be created by postpetition lien avoidance or by the valuation of collateral under § 506(a).9


 

1  11 U.S.C. § 1322(b)(2) was not amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005); but the definition of “principal residence” may have been incompletely changed by the addition of a new term, “incidental property,” in 11 U.S.C. § 101(27B). See § 454.1 [ Principal Residence Redefined? ] § 79.2  Principal Residence Redefined by BAPCPA.

 

2  See § 121.2 [ Timing Issues: Prepetition Changes in Collateral or Use ] § 80.5  Timing Issues: Prepetition Changes in Collateral or Use.

 

3  See § 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA.

 

4  See §§ 50.1 [ Available in Chapter 13 Cases ] § 49.1  Available in Chapter 13 Cases51.2 [ Protecting Lienholder after Lien Avoidance ] § 49.5  Protecting Lienholder after Lien Avoidance.

 

5  In re Green, 7 B.R. 8 (Bankr. S.D. Ohio Aug. 15, 1980) (Sidman). Accord In re Baksa, 5 B.R. 184 (Bankr. N.D. Ohio July 3, 1980) (White).

 

6  Dent v. Associates Equity Servs. Co. (In re Dent), 130 B.R. 623, 630 (Bankr. S.D. Ga. Aug. 28, 1991) (Dalis) (At the petition, mortgage holder had a perfected security interest in the debtor’s escrow payments for taxes and insurance. That the mortgage holder canceled the addendum to the deed to secure debt after the filing of the petition and released the debtor’s escrow payments cannot restore to the creditor the protection from modification in § 1322(b)(2). “[T]he secured creditor cannot . . . post-petition improve its position under § 1322(b)(2) by releasing its lien against only part of its collateral.”). See also § 124.1 [ Claims Secured by Bank Deposits, “Shares” or Escrow Account Balances ] § 80.8  Claims Secured by Bank Deposits, “Shares” or Escrow Account Balances.

 

7  In re Groff, 131 B.R. 703 (Bankr. E.D. Wis. Aug. 23, 1991) (Shapiro) (Prohibition against modification in § 1322(b)(2) is not available to a creditor with a security interest in two 80-acre parcels of real estate and a second home notwithstanding that the debtor proposes to surrender as part of the plan all collateral other than the debtor’s principal residence. Lenders cannot create protection against modification under § 1322(b)(2) by waiving interest in all collateral other than the debtor’s principal residence; therefore, debtor cannot create protection for the creditor by selectively abandoning all collateral other than the debtor’s principal residence. The crucial date for determining whether a creditor is entitled to the protection of § 1322(b)(2) is the date of the petition.).

 

8  In re Dinsmore, 141 B.R. 499 (Bankr. W.D. Mich. June 26, 1992) (Howard) (Crucial date for § 1322(b)(2) purposes is the date of the petition. At the petition, second mortgage was secured by principal residence and by commercial real estate. That relief from the stay was granted after the petition and the commercial real estate was sold before confirmation does not trigger the antimodification provisions of § 1322(b)(2).).

 

9  In re Graham, 144 B.R. 80 (Bankr. N.D. Ind. June 30, 1992) (Grant) (Whether a creditor holds a lien on property other than the debtor’s principal residence is determined without regard to postpetition events. That the debtor might avoid the creditor’s lien on the other property or that the lien may be valueless because of claim splitting under § 506(a) is not relevant. At the petition, the creditor had a security interest in other property because of a dragnet or cross-collateralization clause in the mortgage contract. That the other property might be worth less than the liens ahead of the bank’s did not entitle the bank to the protection of § 1322(b)(2).). See § 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA for discussion whether wholly unsecured junior liens are protected from modification by § 1322(b)(2).