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Appeals court clarifies lien stripping process in Chapter 13 case

From its location in Virginia, the U.S. Court of Appeals for the Fourth Circuit has overturned a lower court decision about stripping liens in Chapter 13 bankruptcy cases. The appeals court ruled that no proofs of claim were necessary to strip a wholly unsecured lien.

The controversy arose from a Chapter 13 bankruptcy filed on behalf of a married couple. Multiple liens were put on the couple's home. Community Bank of Tri-County held two of the liens without security. The bank chose not to file any proofs of claim as part of the couple's bankruptcy. The couple pursued stripping of the unsecured liens by filing an adversary complaint as described under section 1322(b). The bankruptcy court, however, cited section 506(d) when refusing to strip the liens on the basis that the lender had not filed proofs of claim. The court did remove the third lien on the home, which was held by PNC, because the lender had filed a proof of claim.

When the Fourth Circuit analyzed the case, it applied precedents from other cases to overturn the original decision about the couple's liens. The court pointed out that only sections 506(a) and 1322(b) applied to Chapter 13 strip-off issues. Section 506(d) as applied in the original ruling actually only addresses lien stripping for Chapter 7 bankruptcy cases.

Bankruptcy sometimes is a viable choice for a person grappling with insurmountable debts. An attorney could assist someone with the decision to seek bankruptcy protection that could stop creditor harassment. A lawyer could prepare the financial disclosures for the court and inform a person about which assets might be exempt from the process, such as retirement accounts or a primary residence. With legal support, a person might gain a fresh financial start.

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