Johnson v. Home State Bank
Headline: Bankruptcy ruling lets a debtor include a mortgage lien in a Chapter 13 repayment plan even after personal liability was wiped out in Chapter 7, enabling homeowners to restructure property-secured debt.
Holding: The Court held that a mortgage lien that survives a Chapter 7 discharge remains a "claim" and may be included and rescheduled in a Chapter 13 plan, reversing the lower court's contrary ruling.
- Allows debtors to include surviving mortgage liens in Chapter 13 repayment plans.
- Preserves creditors' rights to foreclose on property even after a Chapter 7 discharge.
- Resolves conflicting federal appeals court rulings on this bankruptcy issue nationwide.
Summary
Background
A farmer borrowed money from a bank and gave a mortgage on his farm to secure promissory notes. After he defaulted, the farmer filed for Chapter 7 liquidation and the bankruptcy court discharged his personal obligation on the notes. The bank’s right to foreclose on the property survived that discharge, and the bank obtained an in rem judgment against the property. Before the foreclosure sale, the farmer filed a Chapter 13 plan that listed the bank’s mortgage as a claim and proposed scheduled payments and a final balloon payment to match the in rem judgment.
Reasoning
The Court addressed whether a mortgage interest that survives a Chapter 7 discharge counts as a “claim” that can be included and rescheduled in a Chapter 13 plan. Relying on the Bankruptcy Code’s broad definition of “claim” as a right to payment or to an equitable remedy, and on rules that treat claims against a debtor’s property as claims against the debtor, the Court held that a surviving mortgage interest is a claim. The Court rejected the bank’s argument that allowing such inclusion would improperly allow serial filings to evade limits, noting Congress did not bar a Chapter 7 followed by Chapter 13 and that bankruptcy courts have tools to police bad faith and feasibility.
Real world impact
The decision means debtors who previously obtained a Chapter 7 discharge can still propose Chapter 13 plans that treat surviving mortgage liens as claims. Creditors keep their property-based remedies (foreclosure) but may have to accept a Chapter 13 payment plan. The Supreme Court reversed the Tenth Circuit and remanded the case for further review of the plan’s good faith and feasibility.
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