A “strip-down” would allow the debtor to only be obligated to repay the fair market value of the property, even though the outstanding debt may be significantly greater than the value of the mortgaged property.

Debtor Dewsnup filed an adversary proceeding against the lender in her Chapter 7 bankruptcy to “strip” and undersecured mortgage.

The Debtor contended that the debt she owed to a secured creditor of about $120,000.00 exceeded the fair market value of the land securing the debt and that, therefore, the Bankruptcy Court should reduce the lien on the land to the land’s fair market value.

Bankruptcy rules provide that a lien is void to the extent that it secures a claim against the debtor that is not an allowed secured claim.

Dewnup reasoned that the creditor would have only a secured claim to the extent of the judicially determined value of the collateral, since under the Code, a lien on property in which the estate has an interest is a secured claim to the extent of the value of such creditor’s interest in such property.

Here, the Court determined that the then value of the land in question was only $39,000.00, but the Court refused to grant the relief requested by the debtor.

The U.S. Supreme Court held that the Bankruptcy Code and statutes do not allow the debtor to “strip down” the creditor’s lien to the actual value of the property. If this were to be allowed, then the debtor could effectively void any additional interest of the secured party that exceeded the fair market value.

The creditor in this case could have lost approximately $81,000.00 if the Court had ruled in the debtor’s favor.

Although the Court determined that the fair market value of the property was only $39,000.00, the Court nevertheless held that the debtor could not avoid the additional $81,000.00 debt owed on the secured loan in the Chapter 7 bankruptcy.

In conclusion, the debtor will be forced to repay the entire balance owing, or debtor will lose the collateral to be sold by the creditor and, the lender can enforce the terms of the mortgage and foreclose.

Author: Charles R. Harroun, Attorney at Law