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Partially secured lien cannot be stripped in court ruling

Florida residents may be interested in a New Jersey court decision that was handed down on Feb. 17. A U.S. District Court judge ruled that claims for unpaid fees from a condominium association were partially secured by the debtor’s home. This means that they cannot be stripped when filing for Chapter 13 bankruptcy. It reversed an earlier ruling from a bankruptcy court, and the judge remanded the case.

In the case in question, a couple who owned a condo in New Jersey owed $18,761 to Whispering Woods Condominium Association. The couple wanted to pay $1,494 to cover six months worth of unpaid fees and assessments while stripping the rest through Chapter 13 bankruptcy. The district court ruling said that the bankruptcy court erroneously found that the unpaid fees and assessments were a wholly unsecured claim.

If the bankruptcy court’s ruling would have stood, the couple would only have had to pay six months of fees and assessments that had not yet been paid. However, this was found to be in error because the lien was partially secured by a the debtor’s principal residence. Under Chapter 13 of the bankruptcy code, as long as even $1 was secured by such collateral, none of the lien could be stripped.

In contrast to Chapter 7, where a debtor’s non-exempt property is liquidated with the proceeds going towards repayment of creditors, Chapter 13 allows eligible debtors to keep their property and repay creditors over a period of from three to five years under a court-approved plan. As this case shows, however, most debts that are secured by a lien on the debtor’s home remain intact and cannot be modified. An lawyer can outline the eligibility requirements that are associated with this chapter.

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