§ 85.5 — Debts Discharged in Prior Bankruptcy and Nonrecourse Debts

Revised: June 2, 2004

[1]

Debtors occasionally come into Chapter 13 cases owning property that is subject to a lien that is not the debtor’s personal obligation. Property acquired “subject to a mortgage” falls in this category. Property acquired by gift, inheritance or property division sometimes comes with mortgages attached but without personal liability. Prepetition property tax sales and tax certificates that are secured by the property but create no personal liability are a form of nonrecourse debt common in Chapter 13 cases.1 Keeping the property often requires confirming a plan that modifies or cures defaults with respect to debt that is not the debtor’s personal liability.

[2]

Chapter 7 debtors sometimes encounter secured claim holders unwilling to reaffirm or permit the debtor to retain property subject to a lien after discharge.2 Recently discharged Chapter 7 debtors file Chapter 13 cases to deal with the liens that survived discharge. The debtor is no longer personally liable to the lienholders, but to keep the collateral the debtor proposes to retire the liens through a Chapter 13 plan. Saving a Chapter 13 debtor’s home may mean managing a nonrecourse lien that passed through a prior bankruptcy case.

[3]

Prior to 1991, there was a significant split of authority whether a Chapter 13 debtor could cure default and reinstate a home mortgage if the debtor’s personal liability had been discharged in a prior Chapter 7 case. On the theory that the Chapter 7 discharge leaves the mortgage holder without a debt in the subsequent Chapter 13 case, some courts concluded that the predicate to application of § 1322(b)(5)—the existence of a claim—was not satisfied, and the debtor could not provide for the surviving lien in the Chapter 13 plan.3 A majority of courts accepted the argument that “claim” in 11 U.S.C. § 101(5) included a lien on property of the estate notwithstanding that the Chapter 7 discharge converted the mortgage into a nonrecourse obligation.4 These courts permitted Chapter 13 debtors to cure default and reinstate home mortgages under § 1322(b)(5) although the debtor was not personally liable to the lienholder.

[4]

In 1991 in Johnson v. Home State Bank,5 the Supreme Court resolved this controversy in favor of the view that discharge of personal liability in a Chapter 7 case does not prevent a debtor from dealing with the surviving lien through a Chapter 13 plan.6 The Supreme Court’s decision was a substantial boost to the “Chapter 20” phenomenon—the use of Chapter 13 on the heels of a Chapter 7 case to manage claims that survived discharge.7 The limits on the use of Chapter 13 as a technique for managing liens and other claims that survive a Chapter 7 discharge are probably found in the good-faith requirement for confirmation.8

[5]

Similar issues arise when the Chapter 13 debtor owns real property that is subject to a lien, but the debtor is not personally liable to the lienholder for reasons other than discharge in a prior bankruptcy case. For example, under the property tax laws of some states, the taxing authority or the purchaser of a tax certificate has a lien against real property to secure delinquent taxes, but the lienholder has no right of action against the owner individually. Applying Johnson, it has been held that the nonrecourse lien created by a property tax collection scheme is a claim that can be dealt with through the Chapter 13 plan by curing default under § 1322(b)(3) or § 1322(b)(5).9

[6]

In In re Lumpkin,10 the debtor acquired from a parent real property subject to a mortgage that was not the debtor’s personal liability. The Chapter 13 plan proposed to cure default and maintain payments on the mortgage under § 1322(b)(5). Applying Johnson, the court approved the plan, reasoning that the mortgage was an “in rem claim” and the Chapter 13 plan “may deal with a claim where there is no personal liability no matter what circumstances underlay the lack of personal liability.”11

[7]

These holdings are consistent with the Supreme Court’s decision in Johnson and demonstrate that the power to cure default in § 1322(b)(3) and (b)(5) applies to claims that are secured by estate property without regard to how the liens came to be attached and without regard to whether the debtor has personal liability to the lienholder. The broad application of Johnson to nonrecourse liens of all sorts became more important to Chapter 13 practice after the Supreme Court’s subsequent decision in Nobelman v. American Savings Bank.12

[8]

Discussed in detail above,13 Nobelman held that the protection from modification in § 1322(b)(2) prohibits a Chapter 13 plan from splitting an undersecured home mortgage into its secured and unsecured components under § 506(b). In Nobelman, the Supreme Court listed among the rights protected from modification by § 1322(b)(2) the right of a mortgage holder to collect any deficiency after foreclosure as a personal liability of the debtor.14

[9]

When the debtor has been discharged in a Chapter 7 case or when the debtor owns property that is only subject to a lien, the rights protected from modification by § 1322(b)(2) will not include any right to collect the claim from the debtor personally.15 The debtor can confirm a Chapter 13 plan that cures default under § 1322(b)(3) or § 1322(b)(5) notwithstanding that the debtor has no personal liability to the mortgage holder. At the completion of payments under the plan, the debtor has a rehabilitated home mortgage—payments to the lienholder are current—and the debtor emerges from the Chapter 13 case just as free of personal liability to the mortgage holder as when the Chapter 13 case began.

[10]

This interaction of Johnson and Nobelman will suggest to some debtors the strategy of first filing a Chapter 7 case to resolve the debtor’s personal liability to a mortgage holder and, after discharge, either converting to Chapter 13 or filing a new Chapter 13 case to manage the surviving nonrecourse lien. The propriety of this maneuver will be tested against the good-faith requirement for confirmation in § 1325(a)(3).16

[11]

The use of Chapter 13 to deal with a lien that survived discharge in a prior Chapter 7 case will be particularly attractive when the lien is not secured by value in the collateral. As discussed elsewhere,17 a substantial majority of courts have held that a wholly unsecured lien on a Chapter 13 debtor’s principal residence is not protected from modification by § 1322(b)(2). In a jurisdiction embracing the majority view, confirmation of a Chapter 13 plan can strip off a wholly unsecured lien that followed the debtor from a Chapter 7 case into the Chapter 13 case.18 Although not altogether in agreement why, the reported decisions hold that a wholly unsecured mortgage lien that survived discharge in a prior Chapter 7 case that is then stripped off the real property in a Chapter 13 case becomes an allowable unsecured claim notwithstanding the absence of personal liability of the debtor.19

[12]

The rights discussion by Justice Thomas in Nobelman could spell trouble for Chapter 13 debtors who acquired mortgaged property before the petition without complying with, or in violation of, covenants or conditions in the debt instrument. For example, in In re Threats,20 the owners and mortgagors of real property quitclaimed title to the debtors before the petition. The mortgage was not assumed by the debtors. The mortgage contained a due-on-sale clause. The debtors fell behind on payments and filed a Chapter 13 plan that proposed to cure the mortgage defaults. Applying Johnson, the court concluded that the mortgage was a claim, notwithstanding the absence of personal liability of the debtor. However, the debtor could not use § 1322(b)(3) or § 1322(b)(5) to cure default because the rights protected from modification by § 1322(b)(2) and Nobelman included the due-on-sale clause and other restrictions on assumption in the mortgage. As explained by the court:

Recognizing that Fleet, a home lender, is the holder of a secured claim, and that such a holder’s rights may be modified to a limited extent under Section 1322(b)(3) and (5), the Court nonetheless holds that they may not be modified to the extent proposed in the Debtor’s plan. Defeating the due-on-sale and assumption clauses would impermissibly modify Fleet’s rights. . . . The term “rights” is not defined. . . . [Debtors’] proposed plan would be a de facto assumption, enabling them to substitute their performance for the Mortgagors . . . [and] would eviscerate the due-on-sale clause without the benefit of restoring rights that the Debtors previously held under any agreement. . . . Fleet’s rights in the property arise and are defined in the mortgage instruments, yet there is no mortgagee-mortgagor relationship to restore. There can therefore be no cure. . . . [P]art of the consideration Fleet bargained for was the right to payment in full upon sale of the property and the right to have the Department of Veterans Affairs approve any proposed assumption of the mortgage. These rights may not be modified in a Chapter 13 plan.21
[13]

The condition in Threats that the Department of Veterans Affairs approve any assumption of the mortgage might have been cured by the debtor’s making a proper application to the Veterans Administration. The prepetition transfer of title to the debtor in violation of a due-on-sale clause is conceptually more difficult to cure through a Chapter 13 plan.22 When the contract gave the mortgage holder the right to demand full payment upon transfer of the property, one district court held that the only way to cure a transfer to the debtor without the lender’s consent was to reconvey the property to the original owner.23 This cure is worse than the disease: once the property is reconveyed, the debtor has a naked possessory interest that is not likely to support management through a Chapter 13 plan by curing default or otherwise.

[14]

In a convincing response to Threats and the other cases noted above, the bankruptcy court in In re Garcia24 found both state and federal law to support the view that a Chapter 13 debtor can manage the debtor-creditor relationship that arose when the debtor purchased property before the petition subject to a deed of trust without assuming personal liability. Citing Johnson, the Garcia court explained:

[T]he Bankruptcy Code recognizes a debtor-creditor relationship whenever a creditor holds a claim secured by the debtor’s property, even if the debtor has no personal liability. . . . Arizona law does not treat the subsequent purchaser as a complete stranger to the deed of trust . . . . To the contrary, Arizona law expressly invalidates any attempt to prohibit a purchaser from acquiring rights in property subject to a lien, even one with a due on sale provision. . . . [T]he deed of trust itself creates a debtor-creditor relationship. It provides that it is binding on all successors of both the original lender and the original borrower. . . . [T]his Court concludes that the alleged lack of a debtor-creditor relationship between the Bank and the Debtors has no bearing on the Debtors’ rights under § 1322.25

 

1  See § 305.1 [ Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case ] § 138.4  Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case for discussion of nonrecourse claims.

 

2  See § 4.8 [ Debtor Cannot Reaffirm or Redeem Property ] § 8.9  Debtor Cannot Reaffirm or Redeem Property.

 

3  Home State Bank of Lewis v. Johnson (In re Johnson), 904 F.2d 563 (10th Cir. 1990), rev’d, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991); In re Lawson, 120 B.R. 859 (Bankr. W.D. Ky. 1990); In re Hundley, 99 B.R. 306 (Bankr. E.D. Va. 1989); In re Jones, 98 B.R. 757 (Bankr. N.D. Ohio 1989); In re Russo, 94 B.R. 127 (Bankr. N.D. Ill. 1988). See In re Wilkinson, 99 B.R. 366 (Bankr. N.D. Ohio 1989) (Debtors who inherited real property subject to a mortgage were not personally liable to the mortgage holder and may not cure arrearages through a Chapter 13 plan.); In re Ross, 95 B.R. 509 (Bankr. S.D. Ohio 1988) (On good-faith grounds, court denies confirmation of Chapter 13 plan filed a few days before the closing of a prior Chapter 7 case where the purpose of the Chapter 13 case is to manage the liens that survived discharge in the Chapter 7 case.); In re Reyes, 59 B.R. 301 (Bankr. S.D. Cal. 1986); In re McKinstry, 56 B.R. 191 (Bankr. D. Vt. 1986); In re Binford, 53 B.R. 307 (Bankr. W.D. Ky. 1985); In re Brown, 52 B.R. 6 (Bankr. S.D. Ohio 1985); Manufacturer’s Hanover Mortgage Corp. v. Fryer, 47 B.R. 180 (Bankr. S.D. Ohio 1985).

 

4  Grundy Nat’l Bank v. Johnson, 106 B.R. 95 (W.D. Va. 1989); Society Nat’l Bank v. Barrett (In re Barrett), 105 B.R. 385 (Bankr. N.D. Ohio 1989); In re Randall, 101 B.R. 708 (Bankr. E.D. Okla. 1989); In re Rorie, 98 B.R. 215 (Bankr. E.D. Pa. 1989); In re Ligon, 97 B.R. 398 (Bankr. N.D. Ill. 1989). See Jim Walter Homes, Inc. v. Saylors (In re Saylors), 869 F.2d 1434 (11th Cir. 1989); Downey Sav. & Loan Ass’n v. Metz (In re Metz), 820 F.2d 1495 (9th Cir. 1987); In re McGrue, 108 B.R. 592 (Bankr. N.D. Ohio 1989) (Chapter 13 debtor can deal with a lien on the debtor’s car that survived discharge in a prior Chapter 7 case. Court cites Jim Walter Homes, Inc. v. Saylors (In re Saylors), 869 F.2d 1434 (11th Cir. 1989), and Downey Savings & Loan Ass’n v. Metz (In re Metz), 820 F.2d 1495 (9th Cir. 1987), with approval.); In re Everhart, 87 B.R. 35 (Bankr. N.D. Ohio 1988) (Debtor is permitted to cure the default and maintain payments on a mortgage under § 1322(b)(5) notwithstanding that the debtor lacked privity of contract with the holder of the mortgage. The mortgage was originally executed by the debtor’s parents. The underlying property was conveyed to the debtor. For eight years the debtor made payments on the mortgage, the mortgage company issued a payment book to the debtor, and when the mortgage company commenced foreclosure proceedings, it named the debtor as a party. The debtor paid in excess of $18,000 on the original note. Although there was no debt assumption, and the mortgage company was not a creditor, fundamental fairness required confirmation of a plan dealing with the mortgaged debt.); In re Hagberg, 92 B.R. 809 (Bankr. W.D. Wis. 1988); In re Klapp, 80 B.R. 540 (Bankr. W.D. Okla. 1987); In re Lagasse, 66 B.R. 41 (Bankr. D. Conn. 1986); In re Lewis, 63 B.R. 90 (Bankr. E.D. Pa. 1986).

 

5  501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991).

 

6  See In re Cushman, 217 B.R. 470, 475 (Bankr. E.D. Va. 1998) (After discharge in Chapter 7 case, Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), establishes that undersecured car lender has in rem claim that can be included in subsequent Chapter 13 plan, but § 506(a) and (d) limit that secured claim to the replacement value of the car.); In re Thorsted, 157 B.R. 5 (Bankr. E.D. Va. 1993) (Under the Johnson definition of claim, a residential mortgage holder has a claim that can be included in the debtor’s Chapter 13 plan when the debtor’s personal liability was discharged in a prior Chapter 7 case and the creditor gave notice of default and accelerated the entire indebtedness under the note.). See § 305.1 [ Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case ] § 138.4  Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case for further discussion of nonrecourse claims and claims discharged in a prior Chapter 7 case.

 

7  See § 19.2 [ Eligibility of a Serial Filer: “Chapter 20” and Beyond ] § 23.1  Eligibility of a Serial Filer: “Chapter 20” and Beyond for discussion of eligibility of a serial filer; see also § 305.1 [ Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case ] § 138.4  Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case for discussion of the management of claims discharged in a prior bankruptcy case.

 

8  See §§ 179.1 [ Frequency of Filing Bankruptcy—Chapter 20 and Beyond ] § 104.2  Frequency of Filing Bankruptcy—Chapter 20 and Beyond and 188.1 [ Greed, Not Need ] § 107.1  Greed, Not Need.

 

9  In re Lago, 301 B.R. 365 (Bankr. S.D. Fla. 2003) (Purchasers of tax certificates are creditors and secured claim holders by virtue of lien rights previously held by tax collector notwithstanding the absence of personal liability.); In re Commings, 297 B.R. 701, 707 (Bankr. N.D. Ill. 2003) (Purchaser under Illinois property tax collection scheme has an in rem right against the debtors’ real property and is a creditor. Citing Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), “Section 102(2) makes clear that a ‘claim against the debtor’ includes a ‘claim against the property of the debtor.’ . . . A tax purchaser like NIC has a claim enforceable against the debtor’s property. . . . Possession of an in rem right against property owned by a debtor in a bankruptcy case gives the tax purchaser a ‘claim’ in the bankruptcy.”). Accord In re Ivory, 146 B.R. 27 (Bankr. D. Or. 1992); In re O’Neal, 142 B.R. 411 (Bankr. D. Or. 1992).

 

10  144 B.R. 240 (Bankr. D. Conn. 1992).

 

11  144 B.R. at 242. Accord In re Curinton, 300 B.R. 78, 84–85 (Bankr. M.D. Fla. 2003) (Citing Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), privity of contract is not required to manage home mortgage through Chapter 13 plan. Debtor acquired title to home from dissolved corporation, but debtor was not personally liable on corporation’s mortgage. “This Court rejects the decisions of the few courts that continue to require privity between debtors and creditors. The Supreme Court in Johnson has told us that a debtor can include a claim in a Chapter 13 plan, even when the debtor is not personally liable for the underlying debt. . . . [T]he debtor has been the title holder of the home since August 1999. The debtor has made payments on the mortgage since 1999 . . . . Pursuant to Johnson, the debtor can include the subject property in the debtor’s Chapter 13 plan because Western United has a claim against the debtor’s property.”); In re Garcia, 276 B.R. 627, 631 (Bankr. D. Ariz. 2002) (There is a debtor-creditor relationship between mortgage holder and Chapter 13 debtor who purchased property subject to deed of trust without assuming personal liability. Citing Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), “the Bankruptcy Code recognizes a debtor-creditor relationship whenever a creditor holds a claim secured by the debtor’s property, even if the debtor has no personal liability.”); In re Rosa, 261 B.R. 136, 139 (Bankr. D.N.J. 2001) (Mortgage holder is not entitled to relief from the stay when debtor is not personally liable on mortgage but debtor is in possession of the real property and under New Jersey law the debtor’s marital interest is sufficient to create a claim for purposes of Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991). Debtor’s almost ex-wife owned real property. Debtor lived on the property. Debtor scheduled a “marital interest” in the property. Debtor’s interest in the property under New Jersey law was the right to joint possession during the marriage. “The right to joint possession is . . . more than a tenancy. . . .Conveyance of the marital residence by the spouse who holds title without the consent of the other spouse does not extinguish the other spouse’s right to joint possession. . . . A purchaser who takes title with knowledge that the record owner is married, and who does not obtain the consent of the other spouse, is liable in damages to the other spouse on account of the right to joint possession. . . . [T]he right to joint possession . . . is a form of property interest in the marital residence. . . . [T]he Supreme Court held in Johnson that if a claim is enforceable against property of the debtor, that claim can be modified under a chapter 13 plan even if the debtor is not personally liable to the lienholder. The court holds that the marital residence is ‘property of the debtor’ who holds a right to joint possession of that property under [New Jersey law].”); In re Trapp, 260 B.R. 267, 271 (Bankr. D.S.C. 2001) (Debtor can cure default and maintain payments with respect to real property notwithstanding the absence of privity of contract between the debtor and the mortgage holder. Nearly two years before the petition, the debtor acquired real property subject to BNY’s mortgage. “[F]ollowing the holding of the Supreme Court in [Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991)], BNY holds a ‘claim’ against Debtor’s estate, even though there is no privity between the bank and Debtor.”); In re Black, 221 B.R. 38, 40 (Bankr. S.D. Fla. 1998) (Debtor can cure default through plan with respect to mortgage on real property that the debtor received from an ex-spouse as part of a property settlement notwithstanding that the debtor is not personally liable on note or mortgage. Applying Florida law, “one that receives a deed from another takes it subject to an outstanding mortgage and is principally liable under the debt.”); In re Hutcherson, 186 B.R. 546 (Bankr. N.D. Ga. 1995) (Applying Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), debtor can cure defaults and satisfy a mortgage secured by real property in which the debtor inherited a one-fourth interest prior to the petition. Although the debtor is not personally obligated to the mortgage holder, the mortgage is a “claim.”); In re Wilkinson, 99 B.R. 366 (Bankr. N.D. Ohio 1989) (Debtors who inherited real property subject to a mortgage were not personally liable to the mortgage holder and may not cure arrearages through a Chapter 13 plan.); In re Everhart, 87 B.R. 35 (Bankr. N.D. Ohio 1988) (Debtor is permitted to cure the default and maintain payments on a mortgage under § 1322(b)(5) notwithstanding that the debtor lacked privity of contract with the holder of the mortgage. The mortgage was originally executed by the debtor’s parents. The underlying property was conveyed to the debtor. For eight years the debtor made payments on the mortgage, the mortgage company issued a payment book to the debtor, and when the mortgage company commenced foreclosure proceedings, it named the debtor as a party. The debtor paid in excess of $18,000 on the original note. Although there was no debt assumption, and the mortgage company was not a creditor, fundamental fairness required confirmation of a plan dealing with the mortgaged debt.). See Heritage Fed. Credit Union v. Cox (In re Cox), 162 B.R. 191, 198 (Bankr. C.D. Ill. 1993) (Debtors can deal with a mortgage on real property through their Chapter 13 plan when the property originally belonged to the debtors but was conveyed to their daughter prepetition, daughter borrowed money secured by the real property, but the proceeds were actually paid to the debtors. The debtors continued to live in the property, paid the taxes and insurance and made some payments on their daughter’s secured loan. The daughter discharged her personal liability on the loan in a separate Chapter 7 case. The court found that the “true nature” of the transaction was that the residence belonged to the debtors and that the creditor had a “claim” against the debtors because it had a mortgage against “their property, their residence.” The creditor’s only remedy of foreclosure “develops into a right of payment because if the DEBTORS do not pay they will lose their residence through the foreclosure.”). But see In re Parks, 227 B.R. 20 (Bankr. W.D.N.Y. 1998) (Personal residence debtor acquired the day before filing by deeding property to himself as executor under his father’s will cannot be managed by paying foreclosure judgment in full during the life of the plan. The absence of privity of contract between the debtor and the mortgage holder precludes the use of § 1322(b)(2). Proposal to pay mortgage foreclosure judgment in full is not a curing of defaults under § 1322(b)(3) or (b)(5) because debtor has no rights under the original mortgage documents.); Ulster Sav. Bank v. Kizelnik (In re Kizelnik), 190 B.R. 171, 179 (Bankr. S.D.N.Y. 1995) (Debtor cannot cure default and maintain payments on a mortgage where debtor is a tenant with an option to purchase home owned and mortgaged by her grandparents. “This Court believes that [Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991),] should be limited to its peculiar facts and should therefore only govern the resolution of ‘Chapter 20’ cases involving a single mortgagor whose Chapter 13 bankruptcy is preceded by one under Chapter 7. The anomalous results in both [In re Hutcherson, 186 B.R. 546 (Bankr. N.D. Ga. 1995),] and [In re Lumpkin, 144 B.R. 240 (Bankr. D. Conn. 1992),] offend traditional commercial and contract law precepts, based upon a misinterpretation and misapplication of the Supreme Court’s holding in Johnson, and this Court declines to recognize them as guiding precedent. . . . Kizelnik does not have standing in this Chapter 13 case to block the rights of USB as a secured creditor.”).

 

12  508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993).

 

13  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

14  508 U.S. at 329.

 

15  See In re Cavaliere, 208 B.R. 784 (D. Conn. 1997) (The nonrecourse loan that remains after discharge of a partially secured claim in a Chapter 7 case is unenforceable as a personal obligation of the debtor in a subsequent Chapter 13 case.); In re Cushman, 217 B.R. 470 (Bankr. E.D. Va. 1998) (After discharge in Chapter 7 case, Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), establishes that undersecured lender has in rem claim that can be included in subsequent Chapter 13 plan, but unsecured portion of the claim was discharged in the Chapter 7 case and is not enforceable in the subsequent Chapter 13 case.).

 

16  See § 179.1 [ Frequency of Filing Bankruptcy—Chapter 20 and Beyond ] § 104.2  Frequency of Filing Bankruptcy—Chapter 20 and Beyond. See also In re Kirchner, 216 B.R. 417 (Bankr. W.D. Wis. 1997) (Debtors cannot cash out lienholder at the agreed-upon value of real property through a Chapter 13 plan filed after the debtors discharged personal liability to the mortgage holder in a prior Chapter 7 case. After discharge in Chapter 7 case, mortgage holder received a foreclosure judgment on the residence for $75,076.09. Debtors filed Chapter 13, and parties stipulated that value of residence was $43,500. Plan proposed to sell the residence and pay the mortgage holder the agreed value of the residence. Although economics of mortgage holder’s objection is not altogether clear, court reviews Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992), Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993), and Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), and concludes that plan works a prohibited modification of the mortgage holder’s rights under § 1322(b)(2).).

 

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

 

18  See §§ 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA and 305.1 [ Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case ] § 138.4  Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case. See, e.g., In re Gounder, 266 B.R. 879 (Bankr. E.D. Cal. 2001) (Wholly unsecured mortgage lien that survived discharge in prior Chapter 7 case can be stripped off in a subsequent Chapter 13 case under In re Lam, 211 B.R. 36 (B.A.P. 9th Cir. 1997), appeal dismissed, 192 F.3d 1309 (9th Cir. 1999).); In re Akram, 259 B.R. 371 (Bankr. C.D. Cal. 2001) (Wholly unsecured mortgage lien that survived discharge in prior Chapter 7 case can be stripped in subsequent Chapter 13 case under Lam v. Investors Thrift (In re Lam), 211 B.R. 36 (B.A.P. 9th Cir. 1997), appeal dismissed, 192 F.3d 1309 (9th Cir. 1999), subject to limitation from In re 1441 Veteran Street Co., 144 F.3d 1288 (9th Cir. 1998), that res judicata would not apply unless debtor confirmed and completed a Chapter 13 plan.).

 

19  See In re Gounder, 266 B.R. 879, 881 (Bankr. E.D. Cal. 2001) (The nonrecourse unsecured claim that results when a wholly unsecured mortgage lien that survived discharge in a prior Chapter 7 case is stripped off in a subsequent Chapter 13 case is allowed by § 506(a) for the full amount of the debt. “The use of 11 U.S.C. § 506(a) pursuant to [Lam v. Investors Thrift (In re Lam), 211 B.R. 36 (B.A.P. 9th Cir. 1997), appeal dismissed, 192 F.3d 1309 (9th Cir. 1999),] in the chapter 13 case resulted in the completely undersecured claim being converted into an unsecured claim against the chapter 13 estate (as opposed to the debtor). . . . If the security had no value, section 506(a) would convert the nonrecourse claim against the debtor into a recourse claim against the bankruptcy estate. . . . The debtor cannot object to the unsecured claim on the ground that the debt was a nonrecourse debt. While the creditor may have had no recourse against the debtor, section 506(a) gives the creditor recourse against the estate. This is the price of separating the claim from its security.”); In re Akram, 259 B.R. 371, 378 (Bankr. C.D. Cal. 2001) (After [Lam v. Investors Thrift (In re Lam), 211 B.R. 36 (B.A.P. 9th Cir. 1997), appeal dismissed, 192 F.3d 1309 (9th Cir. 1999)]-stripping, wholly unsecured mortgage lien is an allowable unsecured claim for the full amount of the note. “[B]ecause the amount of these secured claims remained unaffected by the chapter 7 discharge, the ‘Lam-stripping’ of these secured claims in the chapter 13 case resulted in valuing the secured claims at zero secured, . . . and turned the full amount owed to each creditor (pursuant to that creditor’s Note) into a general unsecured claim, for chapter 13 purposes.”). But see In re Petry, 76 B.R. 651 (Bankr. C.D. Ill. 1987) (Unsecured portion of mortgagee’s claim is not entitled to payment in full along with other unsecured claim holders when mortgage passed through a prior Chapter 7 case in which the debtor received a discharge and mortgage was not properly reaffirmed because debtor did not appear at a hearing at which the admonitions required by § 524 were delivered.).

 

20  159 B.R. 241 (Bankr. N.D. Ill. 1993).

 

21  159 B.R. at 243. Accord In re Lippolis, 228 B.R. 106 (E.D. Pa. 1998) (“Terre tenant” who received title to real property subject to a mortgage the day before filing Chapter 13 petition cannot retain title and cure default because mortgage contains a due-on-sale clause that can only be cured by retransferring the title. Truitt, the debtor’s mother, owned a home mortgaged to Equity One. The debtor and his family lived in the house. Mortgage was delinquent for 21 months. On October 15, 1996, Truitt filed a Chapter 13 in New Jersey. Plan was confirmed, payments became delinquent, Equity One was granted relief from the stay. Sheriff’s sale was scheduled for November 14, 1997. On November 12, Truitt voluntarily dismissed New Jersey case and deeded the property to her son. Son then filed Chapter 13 case in Pennsylvania on November 13, 1997, the day before the foreclosure sale. Plan proposed to cure the arrearages over five years and maintain the regular mortgage payment. Bankruptcy court denied relief from the stay and denied dismissal and confirmed plan. On appeal, district court reversed. Mortgage contract contained a provision that any transfer of title without the lender’s consent gave lender option to require immediate payment in full. To use § 1322(b)(5) to cure the default that occurred when Truitt transferred the property to the debtor would require the debtor to retransfer the property to Truitt. If retransferred, the debtor would then not be able to cure default because the debtor would be “out of title.” State law would only allow a “terre tenant” to pay the mortgage in full; debtor’s plan does not propose to do so.); In re Allen, 300 B.R. 105 (Bankr. D.D.C.) (Mortgage holder is entitled to annulment of automatic stay and of codebtor stay to validate postpetition foreclosure sale because debtor acquired an interest in property from her son three days before petition in violation of due-on-transfer clause and § 1322(b)(2) prohibits any management of the son’s mortgage except by restoring full ownership to the son.), stay denied pending appeal, 300 B.R. 127 (Bankr. D.D.C. 2003); In re Martin, 176 B.R. 675, 676–77 (Bankr. D. Conn. 1995) (Citing In re Threats, 159 B.R. 241 (Bankr. N.D. Ill. 1993), debtor cannot use § 1322(b)(3) to “waive” the default caused by a transfer to the debtor in violation of a due-on-sale clause. “The debtor asserts that the plan provisions requiring the Bank, in effect, to waive the default caused by the unapproved transfer by compelling the Bank to accept current mortgage payments from the debtor and to accept payments from the Chapter 13 trustee for the arrearages are permissible under § 1322(b)(3). . . . Section 1322(b)(2) prohibits the modification of ‘the rights of the holders of secured claims . . . in real property that is the debtor’s principal residence. . . .’ As explained in [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993),] . . . the ‘rights’ referred to in § 1322(b)(2) are those ‘reflected in the relevant mortgage instruments, which are enforceable under [state] law.’ The debtor has neither alleged nor shown that a due-on-sale clause is not enforceable in Connecticut. The debtor’s plan, therefore, impermissibly seeks to modify the Bank’s rights in violation of § 1322(b)(2). . . . The debtor’s apparent attempt to distinguish ‘waiver’ from the thrust of the Nobelman holding is unavailing.”). Compare In re Black, 221 B.R. 38, 40 (Bankr. S.D. Fla. 1998) (Debtor can cure default through plan notwithstanding due on sale clause in mortgage because lender foreclosed rather than declared the mortgage due in full before the petition. Debtor’s marriage was dissolved three years before the Chapter 13 petition, and real property was transferred to the debtor by property settlement agreement. Debtor assumed the mortgage and later defaulted. Suntrust obtained a final judgment of foreclosure, but Chapter 13 case was filed before foreclosure sale. Suntrust argued that it did not consent to the transfer of the property to the debtor pursuant to the domestic relations court order and thus full amount of the loan was due pursuant to a contractual due-on-sale clause. “There was no evidence presented that at anytime before this bankruptcy was filed did Suntrust intend to enforce the ‘due-on-sale’ provision. There was no evidence presented that Suntrust informed the Debtor . . . that the loan was due in full upon the transfer of the property. . . . Suntrust cannot now enforce that provision.”); In re Jordan, 199 B.R. 68, 69–70 (Bankr. S.D. Fla. 1996) (One-half interest in real property acquired by deed from debtor’s mother subject to a mortgage can be managed in a Chapter 13 case because deed provides that the son will pay the mortgage, and requirement that Secretary of Veterans Affairs approve any assumption of the mortgage is subject to exemption for transfer from parent to child. Debtor’s mother’s Chapter 13 case was dismissed with prejudice to refiling for six months. After dismissal, the mother deeded one-half interest in real property to her son. Deed provided “GRANTEE TO ASSUME AND PAY THE MORTGAGE OF RECORD.” Son then filed Chapter 13. “In the instant case, the Debtor assumed and agreed to pay the mortgage. In Florida, a grantee who purchases mortgaged land from the mortgagor and assumes and agrees to pay the mortgage, becomes the principal debtor and the original mortgagor a surety. . . . The mortgage provides that it can not be assumed without the approval of the Secretary of Veterans Affairs. That provision should be equated with a due on sale clause. . . . The exemptions preventing a lender from exercising the right to approve a transfer are found at 12 U.S.C. § 1701j-3(d) which states in pertinent part that ‘. . . a lender may not exercise its option pursuant to a due-on-sale clause upon— . . . (6) a transfer where the spouse or children of the borrower become an owner of the property.’ The Debtor, having received his ownership interest from his mother, did not need the consent of the mortgagee.”).

 

22  See § 82.3  Nonmonetary Defaults.

 

23  See In re Lippolis, 228 B.R. 106 (E.D. Pa. 1998).

 

24  276 B.R. 627 (Bankr. D. Ariz. 2002).

 

25  276 B.R. at 631–33. See § 132.1 [ Nonmonetary Defaults ] § 82.3  Nonmonetary Defaults for further discussion of curing nonmonetary defaults.