Consumer Bankruptcy

Joining a majority of courts, the New Jersey District Court, in Cook v. IndyMac Bank,[1] held that the debtor, Cook, could not use section 506(d) of the Bankruptcy Code (the “Code”) to “strip off” a wholly unsecured junior lien.[2] Cook’s home was encumbered by a first and second mortgage. Cook sought to strip off the second mortgage pursuant to section 506(d),[3] because the first mortgage exceeded the appraised value of the home.[4] The court denied Cook’s attempted “strip off” because it would grant a windfall to debtors whose property unexpectedly sells for more than its appraised value.[5] The court found that the only way to “strip off” a second mortgage is to contest its status as an allowed claim under section 502 of the Bankruptcy Code.[6]

Debtor Cant Avoid Judgment Lien That Attached Prior to Homestead Declaration

By: Alyssa Baer

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Bailey,[1] the United States Bankruptcy Court for the District of Idaho held that Debtors were not entitled to avoid a judicial lien, pursuant to 11 U.S.C. § 522(f), when Debtors purchased a homestead[2] after the judgment was recorded, since the debtors did not have a prior interest in the encumbered property.[3] In an unrelated state court case, Mountain West Bank (the “Creditor”) obtained a valid judgment lien against the debtors in the amount of $103,847.00, and recorded it in the Office of the Canyon County Recorder in accordance with Idaho law.[4] Then, the debtors purchased undeveloped land in Canyon County,[5] at which time the creditor’s judgment lien attached to the property by operation of Idaho state law.[6] The debtors’ subsequent recording of a homestead declaration with the recorder’s office was insufficient to protect the homestead from encumbrance by the creditor’s judgment lien. However, the debtors later filed for chapter 7 bankruptcy, and claimed their property exempt pursuant to Idaho’s homestead exemption. The debtors then moved to avoid the creditor’s judgment lien, pursuant to § 522(f), claiming that it impaired their homestead exemption.[7]