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Chapter 13 Lien Stripping Not Possible Under Section 506(d)

In a recent decision in Woolsey v. Citibank, No. 11-4014 (10th Cir. Sept. 4, 2012), the U.S. Court of Appeals of Tenth Circuit held that under bankruptcy code section 506(d), a chapter 13 debtor may not “strip off” a completely unsecured junior mortgage against homestead real estate.  This ruling came when other seven federal circuits had already approved lien stripping in such cases.

However, it is to be seen that in the Woolsey, the court based its ruling on code section 506(d).  The court pointed out that the debtor’s lawyers based their arguments on section 506(d), in spite of the court repeatedly pointing out to the debtor to rely on sections 506(a) and 1322(b)(2).  These two code sections have been interpreted by other appeals courts as permitting the stripping of wholly unsecured junior homestead mortgages in chapter 13.

In its ruling, the court went to the extent of observing that that if the debtor had made his case for lien stripping under sections 506(a) and 1322(b)(2), rather than section 506(d), then he would have a “promising argument.”  The court noted that because the debtor had maintained his argument throughout solely on section 506(d), the court had no other alternative but to hold that the mortgage could not be stripped under that section 506(d) of the bankruptcy code.

Thus lien stripping is permissible in chapter 13 under sections 506(a) and 1322(b)(2).  However, it appears that lien stripping is not just possible using section 506(d).

Inside Chapter 13 Lien Stripping Not Possible Under Section 506(d)