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Court Allows Mortgage Lender to Enforce Lien Against Property Years After Chapter 7 Discharge

Years after a debtor obtained a discharge of personal debt in a Chapter 7 bankruptcy proceeding, a mortgage lender with a second-lien mortgage sought to enforce its lien. A bankruptcy court ruled, over the debtor’s objection, that the lender was allowed to do so. In re Cusato, 485 B.R. 824 (Bankr. E.D. Pa. 2013). It ruled that an order issued during the bankruptcy proceeding, which held that the creditor’s claim was unsecured, did not avoid its lien. Bankruptcy law holds that a discharge only applies to a debtor individually, meaning that a creditor can still enforce a lien against property.

The dispute arose in late 2011, more than six years after the debtor obtained a Chapter 7 discharge, when the debtor applied for a reverse mortgage loan to prevent foreclosure by the first-lien mortgage holder. Springleaf Financial Services of Pennsylvania sent the title agent a letter claiming a second-lien mortgage. Although the debtor disputed Springleaf’s claim, she reportedly agreed to pay the claimed amount from the loan proceeds because she could not close on the reverse mortgage loan otherwise. The debtor obtained leave to reopen the Chapter 7 case and filed an adversary proceeding against Springleaf in May 2012, claiming that Springleaf had violated the statutory injunction against collecting discharged or avoided debt under 11 U.S.C. § 524(a).

Springleaf’s claim arose from a loan, secured by a second mortgage, made by its predecessor-in-interest in 2000. The debtor filed for Chapter 13 bankruptcy in November 2000. Several days later, she filed an adversary proceeding against Springleaf’s predecessor asking the court to avoid the second mortgage lien. The predecessor filed a proof of claim that December but never answered the adversary complaint. The court entered a default order in March 2001 classifying the claim as unsecured.

After multiple continuations of the case, the debtor converted the case to Chapter 7 in September 2004. The court entered a discharge order in January 2005 and closed the case that April. Springleaf’s notice to the title agent in late 2011 was reportedly its first attempt to enforce the debt since then. The debtor’s 2012 adversary proceeding alleged that the March 2001 court order avoided the lien, meaning that the statutory injunction prohibited enforcement or collection.

Springleaf moved for summary judgment, arguing that the March 2001 order did not avoid the lien, and the court agreed. It noted that secured claims in excess of the value of the collateral may be deemed unsecured, 11 U.S.C. § 506(a), but that this is not enough to avoid an unsecured lien under § 506(d). See Dewsnup v. Timm, 502 U.S. 410 (1992). Courts have allowed “lien stripping” in Chapter 13 but not Chapter 7 cases. Cusato, 485 B.R. at 830.

The court also noted that the key language of § 524(a)(2) is that it enjoins enforcement of “personal liabilit[ies] of the debtor.” Id. at 828. Liens that are not avoided by the court may still be enforced against property after a bankruptcy discharge. In re Cortez, 191 B.R. 174 (BAP 9th Cir. 1995). The court therefore granted Springleaf’s motion and dismissed the adversary claim. It observed, however, that the debtor could have stripped the lien had she stuck with Chapter 13.

Consumer bankruptcy lawyer Devin Sawdayi has represented clients in the Los Angeles area in Chapter 7 or Chapter 13 bankruptcies for more than 16 years. To schedule a free and confidential consultation to see how we can help you, please contact us today online or at (310) 475-9399.

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