Mr. & Mrs. Crabtree are ecstatic over Mortgage Company giving them a $60,000 loan on their home, a lot and manufactured home. In due course, the loan is closed by a note and mortgage or deed of trust only. The mortgage only describes the real estate because the manufactured home seems to be attached to the lot.

For several years, everything goes well. The Crabtrees are doing well and make their mortgage payments like a fine tuned clock, reducing its balance to $50,000. Things take a dramatic bad turn for the Crabtrees. The husband suffers a serious illness, $40,000 in medical bills not covered by insurance and loses his good job. Mrs. Crabtree loses her job because a local plant closes down. Eventually, both of them get new jobs but at much less pay. The IRS is on them to pay unpaid income taxes from their good years.

Finally, the Crabtrees decide to see a bankruptcy attorney. At first, Chapter 7 seems to be the best thing to do. Their attorney then recommends Chapter 13 because he says there's no mortgage lien on their manufactured home, which constitutes $40,000 of the value of their $60,000 home ( i.e. lot and manufactured home). Moreover, the Crabtrees discover that they can buy an adjoining lot for $20,000 payable over 10 years.

The attorney advises the Crabtrees to:
1. Buy the adjoining lot and move the manufactured home there.
2. Stop paying Mortgage Company entirely.
3. File Chapter 13 Bankruptcy and propose a Plan which pays: in full the debt for the new lot outside the Plan; IRS in full; $20,000 over 5 years to all unsecured creditors, and; abandon to Mortgage Company the lot only (not the manufactured home).

The Crabtrees agree and file. Mortgage Company files a Motion for Relief to foreclose on its collateral, i.e. both the lot and manufactured home. Crabtrees attorney defends alleging that he concedes that Mortgage Company has a valid lien on the lot. Nonetheless, he contends that Mortgage Company has no lien on the manufactured home because the lien was not put on its motor vehicle title or the manufactured home was not made part of the lot. Mortgage Company says nonsense because the manufactured home appeared affixed to the lot and became real estate. Crabtree's attorney says nonsense also and asserts that even if it was affixed, the process to make it part of the lot was not followed and that, therefore, the manufactured home remained personal property(a motor vehicle) and because Mortgage Company did not put its lien on the manufactured home's motor vehicle title, Mortgage Company has no lien against the manufactured home enforceable in bankruptcy.

The Bankruptcy Judge agrees with the Crabtrees and declares that Mortgage Company has no lien on the manufactured home. The Bankruptcy Judge also rules that the first $20,000 in value of the manufactured home is exempt as a homestead and that, therefore, the Crabtrees need only pay $20,000(plus what is owed IRS and for the new lot) through their plan. He arrived at $20,000 by deducting that homestead from the manufactured home's gross value (i.e. $40,000 minus $20,000). Finally, the Bankruptcy Judge confirms the Crabtree's Plan which provides that Mortgage Company will get 50% of the $20,000 or $10,000 the Crabtrees will pay to their unsecured creditors ($50,000 balance minus $10,000 in proceeds of sale of the original lot [it sells for less as a basic lot] or $40,000 unsecured debt to Mortgage Company and another $40,000 in unsecured medical bills or a total of $80,000 in unsecured debt. Because Mortgage Company is one-half of unsecured debt it gets one-half of $20,000 or $10,000). In other words, Mortgage Company gets $20,000 on its $50,000 debt. Conversely, the Crabtrees pay $50,000 ($10,000 by sale of the original lot, plus $20,000 through the Plan, plus $20,000 for new lot) on $110,000 in debt ($50,000 to Mortgage Company, $40,000 in medical bills and $20,000 for new lot). This is almost an exact reversal of roles: Mortgage Company only gets 40 cents on the dollar while the Crabtrees only pay 27 cents on the dollar, yet keep the same assets as they had before bankruptcy.

How can this happen? Legally, it happens because originators at mortgage companies are not taught how to properly perfect a mortgage on manufactured homes. Specifically, they are not taught that in some states manufactured homes can be made part of the real estate (like a normal home) if it's affixed to the real estate and a legal process to make it part of the real estate is followed. If this process is followed, only the normal mortgage or deed of trust need be used. In other states, a lien on manufactured homes can only be legally done by putting the lien on its motor vehicle title as is done with cars (If a manufactured home was not made part of the real estate, as it can in some states, a lien could still be legal by putting the lien on its motor vehicle title). If neither of those procedures are followed, the mortgage as to the manufactured home is void in bankruptcy.

This failure would have the same consequences described in the Crabtree's Chapter 13 Bankruptcy if a Chapter 11 or 12 were filed. In Chapter 7 Bankruptcy the result would be the same as to the Mortgage Company, but the Crabtrees would take their $20,000 homestead in cash if they moved out or would have to pay only $20,000 in cash to the trustee to keep the manufactured home. In other words, in Chapter 7, the debtors could stay in the manufactured home, let the trustee sell it and use the first $20,000 of any third party bid (which is the debtors by virtue of their homestead) to competitively bid against any third party bidder up to $40,000.

There can be bad results of this failure outside of bankruptcy. Because the lien is not on the motor vehicle title, the Crabtrees could sell it to a third party. If that third party is a good faith purchaser for value, i.e. he does not know of Mortgage Company’s lien, it does not appear on the title signed over to him by the Crabtrees and he pays reasonable value for the manufactured home, the third party purchaser's right of ownership cuts-off any lien of Mortgage Company. Simply put, the good faith third party purchaser has no legal obligation to pay Mortgage Company. Again, the lien has disappeared! What about the Crabtrees, haven't they committed fraud on the Mortgage Company by deliberately selling the collateral knowing it was the Mortgage Company’s collateral! Maybe, if the Crabtrees will admit this, but, the Crabtrees may testify that they thought Mortgage Company only had a lien on the lot because none of the loan documents described the manufactured home. This could be successfully countered by the simple fact that the value of the lot alone would not support a $60,000 loan and the Crabtrees knew this (Hopefully some documents might be found indicating the loan was for both lot and manufactured home). Nonetheless, a judge (bankruptcy or otherwise) could find that the Crabtrees were awful dumb and did not understand all of this and, therefore, lacked the intent to find willful fraud and that, therefore, the Crabtrees debt to Mortgage Company is neither fraudulent nor non-dischargeable in bankruptcy.

There is one simple moral: Avoid all of the above by legally perfecting your lien on both the lot and the manufactured home!