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Bankruptcy Courts May Be Warming Up to “Chapter 20” Procedures, Which Combine Chapter 7 Discharge with Chapter 13 Lien-Stripping

Individuals and families may file for bankruptcy protection under Chapter 7, which focuses on liquidating assets and paying down debts in a short period of time. Or they may use Chapter 13, which allows debtors to pay down large portions of their debts over a period of several years and avoid unsecured debts. Deciding which to choose depends on each debtor’s individual circumstances. Some, but definitely not all, courts allow debtors to file a Chapter 7 case in order to pay down their debts and obtain a discharge of unsecured debts, followed shortly afterwards by a Chapter 13 case, which the debtor uses to “strip” one or more liens from their home. This process is informally known as a “Chapter 20” case.

What Is Lien Stripping?

Chapter 13 may be an appealing option for a debtor with an “underwater” second mortgage, meaning a mortgage with a principal balance that exceeds the debtor’s equity in their home, or the amount not covered by a first-priority mortgage. A debtor may be able to use Chapter 13 to avoid an underwater mortgage, a procedure known as “lien stripping.”

By law, a secured creditor’s claim is only “secured” to the extent that the amount owed is equal to or lesser than the collateral’s value—meaning that any amount over that value is considered unsecured debt. 11 U.S.C. §§ 506(a)(1), (d). A Chapter 13 plan may avoid unsecured debts. 11 U.S.C. § 1322(b)(2). The U.S. Supreme Court held earlier this year, however, that lien stripping is not permitted in Chapter 7 cases. Bank of America v. Caulkett, 575 U.S. ___ (2015).

Chapter 20 = Chapter 7 + Chapter 13

Chapter 20, so named because 20 is the sum of 7 and 13, involves filing a Chapter 7 case in order to reduce a debtor’s overall debt load and obtain a discharge of unsecured debts. A debtor may choose to do this because they want to reduce debts quickly, or because their total debt exceeds the amount allowed in a Chapter 13 case. See 11 U.S.C. § 109(e).

Once the Chapter 7 case is closed, the debtor files a Chapter 13 petition. They cannot obtain another discharge of debt, since this is within four years of a Chapter 7 discharge. 11 U.S.C. § 1328(f)(1). The sole purpose of the Chapter 13 would be lien stripping, and that is where some courts disapprove of this practice.

Central District of California Holdings

Avoiding a second mortgage in a Chapter 13 case is generally supported by caselaw in California, provided it is completely underwater. See In re Zimmer, 313 F.3d 1220 (9th Cir. 2002); In re Lam, 211 B.R. 36 (BAP 9th Cir. 1997). Bankruptcy courts in the Central District of California, however, have often been unwilling to allow Chapter 20 lien stripping. See In re Winitzky, No. 1:08-bk-19337, mem. dec. at 9 (Bankr. C.D. Cal., May 7, 2009) (“Because the Court cannot grant a discharge in this case, the Code does not allow the Court to strip the [creditor’s] lien.”)

An unpublished ruling from 2012, In re Darzian, No. 1:11-bk-15373, notice (Bankr. C.D. Cal., Mar. 30, 2012), leaves open the possibility that this district may allow Chapter 20 cases. The court addressed the concerns raised in Winitzky, but it noted that since then, the Northern District has held that the lack of access to a discharge in a post-Chapter 7 Chapter 13 case did not prevent a debtor from stripping liens. Id. at 2, citing In re Tran, 431 B.R. 230, 235 (Bankr. N.D. Cal. 2010). The court stated that it was inclined to grant the debtor’s request.

Since 1997, Los Angeles foreclosure attorney Devin Sawdayi has represented clients in Chapter 7 and Chapter 13 bankruptcy cases. Contact us online or at (310) 475-9399 today to schedule a free and confidential consultation with an experienced financial advocate.

More Blog Posts:

Supreme Court Rules that Chapter 7 Debtor Cannot Strip Underwater Second Lien from Home, Los Angeles Bankruptcy Lawyer Blawg, September 12, 2015

Chapter 13 Case Dismissed Due to Failure to Disclose Prior Bankruptcy Filings, Other Acts Deemed in Bad Faith, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2015

Bankruptcy Courts Disagree on “Chapter 20” Procedures Used to “Strip” Liens from Debtors’ Residences, Los Angeles Bankruptcy Lawyer Blawg, August 6, 2013


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