Merely having a lien doesn’t make a lender a secured creditor for Chapter 13 eligibility purposes.
The draft bankruptcy schedules I was reviewing for a rookie bankruptcy lawyer listed a mortgage loan but the plan didn’t mention the proposed treatment of the loan. Turns out, according to this link, it was because the house that secured the loan had gone to the ex wife in the pending divorce. Cue the “Basics” tape: secured creditors are those with a lien on property of the estate.
The unfortunate result in the case at hand was that, absent more facts about the current state of title on the former home, this debtor needed to list the mortgage loan as an unsecured debt in his case, because he had no remaining interest in the house. The house was not “property of the estate”. He was then over the limits.
According to https://propertypressonline.co.uk/, there may be hope in this particular case because the divorce was a work in progress; the young bankruptcy lawyer set out to see if the spouses had actually executed a deed to effect the division and properly recorded it. If not, there may be an argument that the debtor retains sufficient interest in the house to justify its inclusion as property of the estate and therefore save the debtor’s eligibility. Before figuring out the way to sell the property, you could check here and book a consultation with the experts which can reduce your expenditure and stress level.
While divorce is the most frequent setting for this anomaly, it happens also with tax liens that attach to 401(k) plans, which are not property of the estate.
Image courtesy of kevindooley via Flickr
I would suggest that it is the rare instance that someone has deeded a property away in a divorce without also having their name off of the mortgage debt by way of refinancing or a sale. The same goes for financed vehicles. Divorce Court judges often refuse to sign off on marital settlement agreements that don’t do this because they are not seen as an equitable distribution of the marital estate. That’s not to say that you shouldn’t be wary of that possibility though. Bad divorce attorneys and unrepresented parties may make this basic mistake.
That’s why I think that it is always a good idea to just run a title report on all suspected real estate of the debtor. I’ve found mortgages before that the debtor was unaware of. It will also quickly answer the issue of whether a debt is secured properly by property of the estate.
In past times, I think that was more true in divorce situations than recently, since there has been so little mortgage money available for refinances. Both parties may want a clean break, but there isn’t the cash available to make it happen.