Bankruptcy law is always evolving. While the bankruptcy process is federal, many state laws control whether the debtor can protect property or discharge debts. One undecided area of bankruptcy law is whether a debtor may avoid a lien on real property that is owned jointly by a husband and wife, when only one of the owners files bankruptcy.
Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the asset, after deducting senior liens from the property’s current market value, to secure the unsecured in whole or in part, where the lien exceeds the value of the debtor’s property. Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured.
In plain English, say the property is worth $200,000 and the amount of the liens against it is $300,000. The bankruptcy court could reduce the amount owed on the property to equal the value of the property ($200,000), categorize the rest as “unsecured debt,” and pay or discharge it at the same rate as any credit cards or medical bills. Mortgages can be stripped down to the value of the collateral, with the exception of voluntary liens secured only by the debtor’s residence. However, an entirely unsecured junior mortgage on the debtor’s home can be stripped off, but the amount of the senior liens must exceed the value of the home.
There is a split of authority on the issue of whether only one debtor can avoid a lien on real property when the property is jointly owned by a husband and wife. Bankruptcy courts have decided this issue differently. In the case of Hunter v. Citifinancial, Inc. (In re Hunter), 284 B.R. 806 (Bankr. E.D. Va. 2002), the court stated that because the property was owned as tenants by the entirety, the debtor could not avoid the junior lien because: (a) the debtor was seeking to provide the spouse with a benefit of having filed for relief without her having any of the bankruptcy burdens typically placed on debtors; and (b) the non-filing spouse’s interest was in the whole of the property, not just one-half of the property. Even if the lien was avoided as to the debtor, the lien would remain in place, as against the entire property, with respect to the non-filing spouse. Two Florida bankruptcy court opinions written in 2012 agree with this approach.
In contrast, the bankruptcy court in Strausbough v. Co-op Servs. Credit Union (In re Strausbough), 426 B.R. 243 (Bank. E.D. Mich. 2010), decided the issue differently and allowed the avoidance of a lien against property owned tenants by the entirety even if only one spouse is in bankruptcy. The court in Strausbough concluded that there was no Michigan state law or bankruptcy code section that precluded the plaintiffs from avoiding the liens and therefore allowed the avoidances.
Bankruptcy law is a complex mix of federal and state laws, rules, and court customs. Knowing how to navigate this process takes years of experience. Your bankruptcy attorney is experienced and skilled at guiding you through bankruptcy to reach your goal of discharge. Don’t lose your opportunity to maximize the benefits of a bankruptcy case! Seek out the counsel of an experienced bankruptcy attorney.