When Vince Johnson started looking for a way to keep his home amid financial difficulties, his attorney steered him toward a Chapter 13 bankruptcy plan. But a second mortgage Johnson had on his property in Zimmerman complicated things.
“If we walked away from this house, where were we going to go?” Johnson said in a recent interview. “I didn’t know what we were going to be able to do.”
His attorney, Tim Theisen, filed a plan that would strip the second mortgage off Johnson’s list of debts, giving the bank in question a small portion of the money owed. When the bank didn’t file an objection to that plan, Johnson was able to structure a Chapter 13 plan that allowed him to stay in his house.
While that might sound relatively simple, Johnson’s bank could have played tough and objected to his plan. Now, after a recent appeals court decision in a similar Chapter 13 case, Minnesotans in the same circumstance as Johnson are expected to have an easier time wiping second mortgages off their balance sheet.
“This is one of the few things a bankruptcy attorney can use to help people with second mortgages and help them keep their house,” said Theisen, who works in Anoka.
In an economy where many homeowners are still dangling near the edge of foreclosure, the change could make it easier for people still earning a paycheck to stay in their homes.
The case that changed the law in the 8th Circuit Court of Appeals started with Michael Fisette of Cottage Grove, who filed for bankruptcy in the spring of 2010. He listed assets of $189,000 and liabilities of $347,000 – with most of the debt stemming from mortgages on his home.
Fisette’s attorney, Craig Andresen, prepared a Chapter 13 case, which is a bankruptcy filing for debtors who still have a job and some income. Such plans allow the filer to begin debt repayment without giving up property.
Most Chapter 13 cases are partial payment plans in which a homeowner commonly continues to make existing house and car payments. The remaining debts are usually put together as a package in the Chapter 13 plan and the homeowner makes monthly payments. Those payments usually run three to five years.
When Andresen took Fisette’s case to court, he filed a plan that stripped off the second mortgage on Fisette’s home. The bank that held the loan didn’t object. Still, the bankruptcy judge in the case – Dennis O’Brien – denied confirmation of the plan in December 2010.
O’Brien had noted at an earlier hearing that “the law in this jurisdiction clearly does not allow the debtor to strip the second or third mortgage,” according to court documents.
APPEALS JUDGES THINK DIFFERENTLY
The ruling led to Fisette’s appeal, and – two months ago – an appellate panel in the 8th Circuit disagreed with the bankruptcy court and let Fisette’s filing go through.
The appellate panel of six judges noted that bankruptcy laws don’t bar the stripping of a second mortgage – “a position that has been adopted by all Circuit Courts of Appeal to address this issue.”
So why was the 8th Circuit different? Essentially, because a case hadn’t ever gone through the appeals process. Some attorneys, though, had figured out a way to get second mortgages removed.
In previous cases he’s handled, Theisen – the attorney for Vince Johnson – said that banks have worked with him to allow a debtor to get rid of a second mortgage in Chapter 13.
In two other instances – where banks holding a second mortgage refused to let it go – Theisen filed appeals with the 8th Circuit appellate panel, he said. And both times, that prompted the banks involved to back off.
BANKS WORRIED
Why?
“Banks have been trying to avoid having an appeal because it was fairly certain it was going to be approved,” said David Kelly, a Minnetonka bankruptcy attorney who also handles Chapter 13 cases.
In cases like Theisen’s, banks were willing to let one homeowner walk away from a second mortgage, as the banks were worried an appellate court decision would “open the gates on the dam for all the other Chapter 13 cases with a second mortgage,” Kelly said.
The 8th Circuit includes courts in Minnesota, Iowa, Missouri, Arkansas, Nebraska and North and South Dakota.
But

attorneys say that the bankruptcy courts in most of those states besides Minnesota have case law on the books that supports the stripping of second mortgages in Chapter 13 cases – making Minnesota a bit of an outlier even within the 8th Circuit.
Even though the appellate panel’s decision is being appealed to the full 8th Circuit Court of Appeals, attorneys say they expect the panel’s decision to stand, as it mirrors decisions in other circuits.
In the meantime, the appellate panel’s decision is the law. The change is so new that county recorders are still trying to figure out exactly how the stripped mortgage will be recorded on titles to property.
“All I’m going to care about is what has the court determined,” said Wayne Anderson, the Ramsey County examiner of titles, who’s aware of the change in law. “Give me a court order from bankruptcy.”
A committee of Minnesota Bar Association members is putting together a process of how to record the newly stripped mortgages.
UNDERWATER SURVIVAL
Chapter 13 plans are “the positive side of bankruptcy,” because the debtors need to have a job and regular income, and they’re trying to pay their creditors and keep their homes, said Jasmine Keller, a Chapter 13 trustee who represents the government in cases in the Twin Cities area.
Filers with second mortgages are common, she said. Their first mortgages are typically “under water,” owing more on their home than it’s worth.
“We’re kind of surprised when they have any equity in the house,” Keller said. “Most people are here because they’re losing their homes or have huge medical bills.”
And Chapter 13 plans, though still a relatively small piece of the personal bankruptcy pie, are growing in number.
Currently, there are 6,400 active Chapter 13 cases in the Twin Cities, Keller said, with debtors making payments. In the last year, 2,009 Chapter 13 cases were filed, an 8 percent increase over the previous year.
HOPING TO HANG ON
In Vince Johnson’s case, he and his wife had paid $166,000 for their house in 2004 and later taken out two additional mortgages, each for a little less than $20,000.
The additional mortgages were “just for bills and stuff,” he said. “Every time there’s a death in the family, a wedding, it’s a lot of money. It just seems like everything fell apart.”
During the housing bubble, the Johnson home had a taxable value well over $200,000, which made it easier to get the second and third mortgages.
Today, Johnson says the home is probably worth about $130,000.
The bad news for Johnson, 48, is that the manufacturing firm he worked for shut down recently and he’s been out of work for a few weeks. Chapter 13 plans only work if debtors can stay on the court-ordered payment plan, and Johnson is putting all his energy into a job search, he said.
“I’m hoping we can keep doing what we’re doing,” Johnson said. “I feel bad for my creditors. This economy, it just stinks.”