The decision of the U.S. District Court for the District of New Jersey to reverse an earlier, published decision from U.S. Bankruptcy Court for the District of New Jersey has national consequences in limited super-priority lien states.
Under Chapter 13 of the Bankruptcy Code, a debtor may propose a repayment plan to pay installments to creditors over the course of a three to five year period.
This repayment plan may modify unsecured portions of a lien down to the value of the collateral (e.g., the lot or unit) when the collateral is worth less than the lien. The modification process is referred to as “stripping,” “cramming down,” or “bifurcating” a lien.
But, the Bankruptcy Code does not allow debtors to cram down liens “secured only by a security interest in real property that is the debtor’s principal residence[.]” 11 U.S.C. § 1322(b)(2). Based on this provision, the “anti-modification clause,” modification of claims in a bankruptcy plan is prohibited where those claims are secured or partially secured by the debtor’s principal residence.
The anti-modification clause applies when any amount of the a claim is secured. Even if one dollar of a creditor’s claim is secured by a debtor’s principal residence, then the entire claim (both secured and unsecured portions) cannot be modified.
The New Jersey Condominium Act provides for a limited super-priority (six months) over prior recorded mortgages or other liens (except municipal liens or federal tax liens).
The Court held that the condominium lien has a limited first-priority status (six months) and a partially unsecured, junior status. But, because even a portion of the lien (the “one dollar rule” alluded to above) was secured by a security interest in the debtor’s principal residence, no portion of the association lien could be stripped.
The decision In re: Rones requires debtors to pay the entirety of a limited, super-priority condominium lien as a secured debt to have a Chapter 13 plan confirmed. Currently, the District of Columbia, Puerto Rico and 22 other states have assessment priority lien statutes.