This post assumes familiarity with my last post (part 1) of this multi-part series. Thus, while you can certainly read this post without reading that previous one, you’ll get more out of it if you read that post first.
III. Avoidance Of A Partially Or Wholly Unsecured Lien In Chapters 11 And 13
11 U.S.C. § 506 is used to determine the extent to which a claim is secured. Rather than delving into the wording of the statute, let’s informally say that if the value of the collateral is less than the sum of the liens against it, then at least some of the liens are not fully secured, and some may even be wholly unsecured.
For example, suppose the collateral is a piece of real estate worth $500,000. And suppose there are three liens against it. The first recorded has a balance of $475,000, the second recorded has a balance of $50,000, and the third recorded has a balance of $50,000. Then the first is fully secured because the property is greater in value than the balance of the first. The second is partially secured: $25,000 is secured by the house, and $25,000 is unsecured. And the third is wholly unsecured.
I realize that in today’s real estate market, this scenario is unlikely. However, some years ago it was fairly common. And given the cyclic nature of things, we may see a repeat of the past —plus ça change, plus c’est la même chose.
A. Avoiding A Wholly Unsecured Lien
In Zimmer v. PBS Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002) the Ninth Circuit held that a Chapter 13 debtor can avoid a wholly unsecured lien against the debtor’s principal residence.
Continue Reading Lien Avoidance in Individual Cases – Part 2: Avoidance of a Partially or Wholly Unsecured Lien in Chapters 11 and 13; The Chapter 7 Context