Lien Stripping

We just filed our first “lien stripping” case where we are attempting to strip off a wholly unsecured second lien from a house the debtor owns in Washington DC. The property generates positive cash flow after paying the first lien (which will help the debtor fund her plan), but not enough cash flow to pay the second lien. (The same analysis applies to property here in Texas, but I’m just giving you general info that might be relevant.)

I did a little research and lo and behold, the Southern District of Texas has a procedure for doing this, so basically I just followed/copied/misappropriated theirs. We are doing this by plan provision rather than an adversary. Rule 7001(2) defines adversary proceedings to include “a proceeding to determine the validity, priority, or extent of a lien…” The obvious goal here is to avoid the expense and delay of an adversary. One of the key issues between contested matters and adversaries is procedural due process. In addition to the notice required in the Southern District form, we also serve the registered agent or other appropriate corporate representative. (i.e the president of the bank.) We also serve a “Lien Stripping Notice” separate from the plan which basically says “Hey, you. Yes, you. We are trying to do bad things to you. Pay attention.”

 We had a confirmation hearing which has been re-set based upon an amended plan. At the hearing, our Chapter 13 Trustee and I made sure the judge  knew what I am trying to do. He did not “approve” this procedure, but he basically said give it a shot and we’ll see how it works. If the creditor objects to doing this by plan provision, we may have to re-file as an adversary, but if they don’t, it looks like it will work.


Michael Baumer

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by Michael Baumer