Does Chapter 13 Bankruptcy Preclude Mortgagee Filing Unsecured Defic...

A potential bankruptcy client wanted to avoid a deficiency judgment from a partially first mortgage on his home. The client’s income made him ineligible to file Chapter 7 bankruptcy which would have discharged the deficiency liability in full. The client had heard that filing Chapter 13 bankruptcy could also eliminate the deficiency claim completely.

Upon the filing of a Chapter 13 bankruptcy all creditors have a limited time (60 days after the creditor meeting) to file unsecured claims. A lender could not within the 60 day claim period both complete a foreclosure (stayed by the bankruptcy) and pursue a motion for a deficiency claim resulting in a state court determination of the amount of deficiency. Therefore, the client believed that the first mortgage holder would have only a secured claim for the secured portion of the mortgage but would not have time to file an unsecured claim for a deficiency amount within the unsecured claim period.

I do not think this plan would work. I think the first mortgage holder can timely file both a secured claim and a general unsecured claim for the amount of the unliquidated deficiency. There is a bankruptcy court  decision dealing with a second mortgage holder filing an unsecured deficiency claim on a partially secured second mortgage. The court held that the lender is entitled a general unsecured deficiency claim which would share pro rata in distributions

I believe that a mortgage holder’s deficiency claim will not be precluded by claim filing deadlines. The creditor can file both the secured and unsecured claim with the amount of the unsecured deficiency determined in accordance with state law procedures.

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