Bankruptcy Judge Rejects Debtor's Use Of Ch. 13 Petition In Attempt To Thwart Due-On-Sale Clause In Lender's Mortgage

A recent ruling by Judge Jeff Bohm of the U.S. Bankruptcy Court in Houston, Texas that addressed a number of issues has rejected an attempt by an individual Debtor's attempt use a Chapter 13 petition as a vehicle to thwart a mortgage lender's rights under a due on sale clause.

In the case, an individual, unbeknownst to the lender, acquired a home subject to the lender's mortgage from a third party (the original mortgage borrower), and then filed a Chapter 13 bankruptcy petition shortly thereafter, proposing to pay off the existing loan over a 60-month period, which would have effectively require the lender to allow the Debtor to take over payments on the loan without first evaluating the Debtor's credit and earning capacity necessary to repay the loan.

The ruling is somewhat "fact heavy" and addresses related issues that may be of interest to consumer bankruptcy litigators, and possibly real estate operators and others using the Chapter 13 process to game the bankruptcy system in furtherance of their property investment endeavors.

For the ruling, see In re: Mullin, Case No. 09-39760-H4-13 (Bankr. S.D. Texas, Houston Div., July 2, 2010).