SW Legal studies in Business

Unsecured Liens on Property of Bankrupt May be Extinguished
Description Appeals court held that a valid, recorded lien on real property could be voided in Chapter 13 bankruptcy because the value of the property is not sufficient to provide any security for any part of the lien.
Topic Bankruptcy
Key Words Modification; Unsecured Mortgages
C A S E   S U M M A R Y
Facts The Ponds filed for Chapter 13 bankruptcy. Their house was valued at $69,000. The order of liens on the property was: 1) $1,505 for property taxes; 2) $49,000 for a first mortgage; 3) $20,000 for another mortgage; and 4) $10,630 for another valid, duly recorded mortgage on the property held by Farm Specialist Realty. The Ponds requested the court to void Farm's lien. The Bankruptcy Court refused to void the junior mortgage lien held by Farm. The district court reversed in favor of the mortgagees (the Ponds). Farm appealed.
Decision Affirmed. The first three liens total to more than the value of the property, hence, there was no security to cover any portion of the lien held by Farm. Therefore, it was not a secured debt. As an unsecured debt, it is not protected under the anti-modification provision of the Bankruptcy Code that applies to secured liens on real property. "The Bankruptcy Court should have declared that plaintiff's Chapter 13 plan could void defendants' lien" under the Code.
Citation In re Pond, - F.3d - (2001 WL 589951, 2nd Cir., 2001)

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