When does the sanctity of a monetary lien not survive?

March 11th, 2016 by JBWK

Submitted by Attorney Conway H. Shield, III

Those conversant in the development, purchase and sale of real estate often think that the validity of a monetary lien (think deed of trust) will hold up in every case (except perhaps where the market value of the property, generally the debtor’s residence, is worth less than the face amount of the lien and a default has occurred; these days, that has led to a number of “short sales”).   Unfortunately this is not always correct.


Welcome to the world of bankruptcy law.  A Chapter 13 Plan may modify the rights of the holders of certain secured claims, although it may not modify a security interest in real property that is the debtor’s principal residence, (although this too is subject to certain limited exceptions).  Accordingly, if the debtor owns investment or other property that is not his or her principal residence, the mortgage can be “crammed down” in a Chapter 13 Plan.  This process allows the debtor to reduce the principal balance of the mortgage to the value of the real estate, and then to pay that amount with interest.   Additionally, it may also allow the debtor to reduce the mortgage interest rate.  Also note that under Federal law, a debtor can eliminate in whole or in part liens that impair an exemption to which the debtor is entitled.


Accordingly, a lender, or a person engaged in the real estate transaction who advises a seller where there will be seller-held financing, needs to understand that in order to be perfectly safe, the lender can only loan so much as will be assuredly the market value of the property even in a distressed market.  Also clearly in a Chapter 13 environment, valuation may come down to a battle of experts, if the amount of money in question is large enough to merit the expenditure on an expert.  However, the safe harbor is to ensure, if the secured party wants to know that there is sanctity in the lien that the face amount of the loan can be no more than a conservative estimate of the market value of the property in a down market.


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