Judge Brooks considered the question of whether a Chapter 13 debtor may “strip” a wholly unsecured second lien against his residence under 11 U.S.C. section 506 after he has received a discharge of the debt in a prior Chapter 7 bankruptcy case filed less than four (4) years prior to a subsequent Chapter 13 bankruptcy case.
Courts are split on the issue of whether the bar to entry of a discharge for a Chapter 13 debtor under 11 USC 1328 (f)(1) precludes the debtor from stripping a wholly unsecured lien on the debtor’s residence. Here, the court ruled contrary to a recent decision, In re Mendoza, 2010 WL 736834 (Bankr. D.Colo. Jan. 21, 2010), wherein that court held that it was impermissible to allow a Chapter 13 debtor to “strip” a wholly unsecured lien against his residence under section 506 in a case where he was not eligible for a discharge. In effect, to do so would be to grant a second discharge to the debtor despite the statutory bar to a discharge.
Judge Brooks relied on cases subsequent to Mendoza, including In re Hill,440 B.R. 176 (Bankr. S.D.Cal. 2010); In re Tran, 431 B.R. 230 (Bankr. N.D. Cal. 2010); and In re Grignon, 2010 WL 5067440 (Bankr. D.Or. December 7, 2010), which each hold that the Bankruptcy Code does not condition a Chapter 13 debtor’s right to “strip off” a wholly unsecured junior lien on the debtor’s eligibility for a discharge. The Court agreed with those cases and held that the right to “strip off” a lien is conditioned only on the debtor’s “good faith,” obtaining confirmation of, and fully performing under, a Chapter 13 plan, which plan meets all of the statutory requirements.
Following the “plain language” of the Bankruptcy Code, the Court concluded that, despite the Debtor’s ineligibility for a discharge, he could still “strip off” a wholly unsecured second lien on his residence.
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