Chapter 20 Debtor Can Now Strip a Wholly Unsecured Junior Lien Against A Principal Residence Notwithstanding Debtor’s Lack of Eligibility for a Chapter 13 Discharge

Of course there is no chapter 20 in the Bankruptcy Code.  Chapter 20 is simply a chapter 13 filed in conjunction with and shortly after a chapter 7 case.

One of the most common uses of chapter 20 is to allow a debtor with too much debt to file chapter 13 to strip a wholly unsecured junior lien from his or her primary residence.  A lien strip from a primary residence is not allowed in chapter 7, but a person is not eligible for Chapter 13 if his or her secured debt exceeds $1,149,525, or his or her unsecured debt exceeds $383,175.  Under those circumstances chapter 7 is used to discharge the personal liability of the person with too much debt, and then a second case is filed under chapter 13 for the purposes of stripping the wholly unsecured junior lien(s) from the primary residence.

Until July of 2015 a chapter 20 debtor would have to wait 4 years in between the filing of his or her chapter 7 and the filing of the chapter 13, because a debtor wasn’t entitled to a second discharge until 4 years had passed, and the lien strip had been held to be part of the discharge of debt.  But the Bankruptcy Appellant Panel for the Ninth Circuit recently reexamined this issue and joined a consensus of courts permitting a chapter 20 debtor to immediately file chapter 13 after their chapter 7 for purposes of lien stripping because "nothing in the Bankruptcy Code prevents chapter 20 debtors from stripping such liens off their principal residence,”  The BAP concluded that the completion of the chapter 13 plan payments was the event that finalized the lien strip.

Simply put, the discharge of debt is not longer relevant to the lien strip issue.  A debtor may now immediately file chapter 13 after the conclusion of his or her chapter 7.

Current Bankruptcy Filing Fees

As of 12/1/20202 the filing fees are as follows:

Chapter 7	$338.00
Chapter 9	$1,738.00
Chapter 11	$1,738.00
Chapter 12 (Family Farmer)	$278.00
Chapter 13	$313.00
Chapter 15	$1,738.00

Lien Stripping in Chapter 13

Chapter 13 involves the discharge of the personal obligation to pay most types of debt in exchange for the debtor’s best efforts to repay creditors over a 36 to 60 month reorganization of debt.  The duration of the reorganization plan and the amount of the monthly payments required are based on the application of a formula commonly known as the means test.

In addition to the elimination of the personal obligation to repay creditors, chapter 13 also allows homeowners to strip, or eliminate, junior liens (e.g., home equity line of credit or judgment liens) from their homes.  The end result is that the homeowner keeps the home but never has any further obligation to pay the stripped junior liens.  This lien stripping feature of bankruptcy is not available in chapter 7 cases.

To qualify for chapter 13 a homeowner must have regular income, secured debts under $1,081,400, and unsecured debts totaling less than $360,475.  And to qualify for a lien strip, the appraised value of the home must be less than what is owed on the first mortgage.

As an example of what is possible in these lien strip cases, one of my current clients is paying approximately $250 per month for 36 months, and at the end of that period she will retain all her property, be completely debt free, and only the first mortgage lien will remain.

It is crucial to consult with experienced bankruptcy counsel to ensure that the means test is properly calculated so that the lowest payment and shortest duration plan is approved.  For qualified homeowners, the attorney’s fees can be paid through the monthly plan payments (effectively coming out of what would otherwise go to the creditors of the case) so the “out-of-pocket” cost to the homeowner can be remarkably low.

Means Testing Outline

Means Testing  (Form B22A)
A.  Business vs. Consumer Debts
1.  If primarily business debt no means testing is necessary.
2.  "Primarily" means "majority."
B.  Calculate Current Monthly Income
1.  Includes all sources of income except Social Security Benefits for the six-month period ending on the last day of the month before filing.
C.  Compare Annualized Gross and  Median Family Income
1.  Means testing information available from the U.S. Trustee's Website.
2.  If debtor's annualized gross is below median income in the state the debtor resides compared to a family of the same size, no further means testing necessary.  Chapter 7 is available.
3.  Where debtor's annualized gross is above the median the consumer debtor must complete the means test to determine whether a presumption of abuse of chapter 7 arises due to the ability to repay debt.
D.  Calculate Disposable Income
  1.  Deduct categories of allowed expenses from current monthly income.
   i.  Most allowed expenses are from the IRS, but a few come from the debtor's facts.
2.  Where 60-month disposable income is less than $7,475, no further means testing is necessary.
i. A short chapter 13 or 7 is available.
3.  Where 60-month disposable income is more than $12,475, a presumption arises that the debtor would abuse chapter 7 if granted a discharge.   A 60-month chapter  13 may be required.
4.  Where 60-month disposable income is more than $7,475, but not more than $12,475, and the available disposable income is sufficient to repay 25% of the debtor's general unsecured claims, a presumption arises that the debtor would abuse chapter 7 if granted a discharge.  A 60-month chapter 13 may be required.
E.  Rebuttal of the Presumption of Abuse
1.  The burden of proof shifts to the debtor to show granting a discharge under chapter 7 would not be abusive of the Bankruptcy Code.
2.  Atypical income events may unfairly skew means testing results.
i.  Lanning:  Current Monthly Income is usually all that is required, but courts can consider known or virtually known information regarding the debtor's income or expenses.

Waiver of Bankruptcy Filing Fees

If a client cannot afford to pay the bankruptcy filing fee either at the time of filing or in installments, a waiver of the filing fee is available only if the client’s gross monthly income is less than 150 percent of the official poverty line applicable to the client’s family size.

*2015 Income Poverty Guidelines:
Household of 1:  $1,471.25
Household of 2:  $1,991.25
Household of 3:  $2,511.25
Household of 4:  $3,031.25
Household of 5:  $3,551.25
Household of 6:  $4,071.25
Household of 7:  $4,591.25
Household of 8:  $5,111.25
For each additional person add:  $520.00

If the client's monthly income averages over the guideline amounts cited above the filing fee must be paid either in full when the case is filed, or in three monthly installments the first of which is due when the case is filed.

*These amounts are for the contiguous 48 states and Washington DC.  Alaska and Hawaii have higher monthly amounts.  

Why My Fees Are Less

During my 12 years of practice I have actually had a few clients tell me that my fees are too low. But there is a good reason why my rates are so much lower than firms that advertise on television:

By handling every aspect of your case personally, using a home office, relying on electronic communication, and using only free advertising, I’ve kept the costs of operating my practice far below my competitors’. I pass these savings on to you.

My flat-rate scale starts at $800.00 for cases in which the debtor has earned no income or has only received social security benefits during the six-month period just prior to filing. For wage earners my fee is $1,000.00, because these cases take a bit more time to prepare. Likewise, for independent contractors and small business owners my fee is $1,200.00 because these cases typically take a bit more time.

Introduction to Bankruptcy

The Bankruptcy Code is divided into chapters. The chapters that usually apply to consumers are Chapter 7, where most or all of your debt is wiped out, and Chapter 13, which involves a repayment plan. In most cases, once you file your case, the "Automatic Stay" immediately goes into effect. The Automatic Stay means that a bankruptcy filing automatically stops, or stays, and brings to a halt most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection harassment. Generally, creditors cannot take any further action against you or your property without permission from the Bankruptcy Court.

Chapter 13 is a valuable tool that lets consumers catch up overdue mortgage or car payments, taxes and domestic support obligations. It also applies where a consumer has the ability to repay some or all of his or her debts over time. A consumer must have less than $360,475.00 in unsecured debt (such as credit cards and doctor's bills) and less than $1,081,400.00 in secured debt (such as mortgages and car loans) to qualify for Chapter 13. The filing fee for a Chapter 13 is $274.00.

Under Chapter 13, a consumer keeps all of his or her property, both exempt and non-exempt, as long as the consumer resumes making the regular payments on secured debt and keeps current under the bankruptcy repayment plan. A repayment plan can last for up to five years. After finishing the plan's payments, most of the consumer's unsecured debts are discharged.

Chapter 7 is designed for people who are having financial difficulties and are not able to repay their debts. Consumers can usually qualify for a Chapter 7 if the consumer's average gross monthly income for the last six months is below the state’s Median Income, the consumer's gross income less certain expenses is below the state’s Median Income, or the consumer can show "special circumstances" that would allow the consumer to qualify for Chapter 7. The filing fee for a Chapter 7 is $299.00.

Under Chapter 7, a consumer can usually exempt, or keep, most or all of the consumer's assets under California law, or, if the consumer has not lived in California for the past two years, under the state’s exemption law that applies to the consumer's case. Most retirement accounts and pensions are also exempt. Secured property, normally the consumer's car and house, may not have any net equity, in which case the consumer can keep it as well. The Trustee liquidates most non-exempt property and uses the proceeds to pay the consumer's creditors according to priorities of the Bankruptcy Code.

Once the Chapter 7 case is over, the consumer receives a Discharge. The discharge prevents creditors from taking any steps to try to collect their unsecured debt. They cannot call, write, sue, or take any steps that could be considered an attempt to collect its debt. If a consumer wants to keep property that has a lien on it, the consumer must keep payments current, and may be required to reaffirm the debt. Some debts can not be discharged. Typical examples are child support, alimony, and other domestic support obligations, some taxes, student loans, criminal restitution, and debts for death or personal injury caused by operating vehicles while intoxicated with alcohol or drugs.