A so-called “Chapter 20” case involves a debtor who files a Chapter 7 case, receives a discharge, and thereafter files a Chapter 13 case.
A debtor who has previously filed a Chapter 7 case can file a Chapter 13 without waiting for the four years required in order for the court to issue a discharge. Johnson v. Home State Bank, 501 U.S. 78, 87 (1991);see also Branigan v. Bateman (In re Bateman), 515 F.3d 272 (4th Cir.2008)(holding that notwithstanding a debtor’s inability to obtain a Chapter 13 discharge, a debtor is nonetheless eligible to file a Chapter 13 case).
As the Fourth Circuit stated, “a Chapter 13 debtor ineligible for a discharge may ‘file a Chapter 13 case and utilize the tools in chapter 13 to cure a mortgage, deal with other secured debts, or simply pay debts under a plan with the protection of the automatic stay.’ “ Branigan v. Bateman ( In re Bateman ), 515 F.3d 272, 283 (4th Cir.2008) (“it is the ability to reorganize one’s financial life and pay off debts, not the ability to receive a discharge, that is the debtor’s ‘holy grail.’ “)( citing 8 Collier P 1328.06 ).
One of the main reasons a debtor would be interested in filing a Chapter 13 bankruptcy right after filing Chapter 7 bankruptcy is the ability to strip-down and/or strip off wholly unsecured liens something that a debtor cannot do in a Chapter 7. See Dewsnup v. Timm, 502 U.S. 410 (1992) (holding that Section 506(d) does not permit the strip down of a partially secured lien); see also Ryan v. Homecomings Financial Network,253 F.3d 778, 781–83 (4th Cir.2001) (holding that an allowed, wholly unsecured consensual junior lien may not be stripped off in a Chapter 7 case).
In Chapter 13 you can strip-off wholly unsecured liens such as a second mortgage even on your primary residence. See J First Mariner Bank v. Johnson, 411 B.R. 221 (D.Md.2009), aff’d, 2011 WL 52358 (4th Cir. Jan. 06, 2011)(Holding that Nobelman v. American Savings Bank, 508 U.S. 324 (1993) did not prohibit the strip off of a wholly unsecured junior lien on a debtor’s principal residence in a Chapter 13 case);Johnson v. Asset Management Group, LLC, 226 B.R. 364 (D .Md.1998).
The strip off an unsecured junior mortgage lien is governed by two Bankruptcy Code provisions; namely, Sections 506 and 1322(b). Section 506 allows the court to declare void an unsecured lien and Section 1322(b) allows the court to modify the rights of a creditor, such as your mortgage lender. These two sections operate to give the court the authority to strip off an unsecured lien.
For example, if the balance on your first mortgage is $200,000 and you have a second mortgage with a balance of $35,000.00 but your home is now worth only $180,000.00. In this scenario your first mortgage is secured up to the value of your home at $180.000.00 while the second mortgage would be considered wholly unsecured because your home is worth less than the first mortgage.
It is important to note that the second mortgage in the above scenario would be treated as unsecured claim and paid in the same manner as the other unsecured claims.
As you can see, the ability to strip off a second mortgage can help some debtors keep their most prized possession, their house, by lowering their mortgage payment. This tool will not work for every debtor and careful analysis of all the facts available is required. However, for some debtors this makes sense and it is clearly an amazing tool to have.
Posted by Joseph K. Githuku
Disclaimer: Please note this is not legal advice and the contents of this entry are provided for informational purposes only. Consult a knowledgeable bankruptcy attorney if you have questions about this issue.