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 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.
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.
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.
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