In re: Schneider, No. 10-11878 (Bankr. N.D. Calif., January 10, 2011).
In a recent 9th Circuit bankruptcy decision, a California bankruptcy court held that state tax liens on a home for unpaid taxes could be valued by the court, but only to the extent they were not dischargeable in bankruptcy.
In Chapter 13, a debtor may eliminate a lien or part of a lien to the extent it is unsecured. This means that, if a debtor owes more on his home than the home is worth, he may be able to get rid of the amount owed that exceeds the home's value. This is called "strip down". To the extent the lien is unsecured, it may be discharged during the course of the bankruptcy proceedings.
In this case, the debtors owned a home which they argued was worth less than the amount of the mortgage it was secured by. Ordinarily, then, the debtors might be permitted to strip down the remainder owed on the mortgage that exceeded the home's value. However, the debtors also attempted to strip down three tax liens that were secured by their home, arguing that these liens also exceeded the value of the home.
A tax lien may be valued during a Chapter 13 plan. However, it is not possible to permanently remove a lien to the extent that a lien secures a nondischargeable debt. Typically, unpaid taxes owed to the federal or state government are often non-dischargeable in bankruptcy. Therefore, the court held that if the debt underlying the lien was found non-dischargeable, the debtors would not be permitted to strip down the lien.
