Sunday, August 30, 2015

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.