New Plan Provision Allows Lien Stripping Without An Adversary Proceeding

Stripping unsecured liens without an adversary proceeding is now easier for debtors in the Northern District of Illinois (Chicago). The new Model Plan adds a section specifically for lien stripping. Debtors will be required to use this new plan commencing October 15, 2010, but the plan is available online now, and debtor’s attorneys can start using it immediately.

Previously, if a plan sought to strip a lien, language to that effect was inserted in the Special Terms section at the end of the plan. A creditor must be aware of this new section so as not to miss a debtor’s intention to strip its lien.

The new Model Plan adds Sec. E. 3.2, titled Other secured claims treated as unsecured, and is as follows:

The following claims are secured by collateral that either has no value or that is fully encumbered by liens with higher priority. No payment will be made on these claims on account of their secured status, but to the extent that the claims are allowed, they will be paid as unsecured claims, pursuant to Paragraphs 6 and 8 of this section. (a) Creditor: _________________Collateral:_________________________

This section permits a debtor to declare a lien unsecured and then pay it as an unsecured claim along with other unsecured creditors. Coupled with Sec. B. 3, which provides that a creditor must release its lien upon discharge (or earlier if the debtor pays off the debt in full), this permits lien stripping without an adversary proceeding. Liens would be stripped at discharge.

To further trip up lien holders, the plan also provides in Sec. E. 8. that:

Any claim for which the proof of claim asserts secured status, but which is not identified as secured in Paragraphs 2, 3.1, or 3.2 of this section, will be treated under this paragraph to the extent that the claim is allowed without priority.

This means that if a creditor files a secured claim, and it is not listed in these sections, it will be paid as an unsecured claim by operation of the plan.

Some of the judges in the Northern District of Illinois will still require an adversary proceeding to strip liens even if debtors fill out this section. I’ve talked to the chair of the court’s liaison committee, and this will be on the agenda at the next meeting. Hopefully, the inquiry will help identify which of our eleven judges will accept the plan provision in lieu of an adversary proceeding.

So, lien holders must now check in three places within the plan to determine the treatment of their claim. First, look to see if your claim is identified as secured in Sec. E. 2, 3.1, or 3.2. If it is not listed at all, it will be treated as unsecured. If it is listed in Sec. E. 3.2, it will be treated as unsecured. Finally, check in the Special Provisions Section at the end of the plan. If a judge still requires an adversary proceeding, the intention to file an adversary to strip the lien and pay the claim as unsecured may be listed there.