An inventive use of federal bankruptcy law enables some debtors to eliminate liens from their homes through a process known as “Chapter 20.” The name refers to the sum of 7 and 13, since the process uses both Chapter 7 and Chapter 13 proceedings. Not all courts agree that Chapter 20 lien stripping is permissible after the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Federal courts in different parts of California have reached different conclusions about Chapter 20. The Fourth Circuit Court of Appeals on the East Coast joined the ranks of courts that have affirmed the process last year. In a 2-1 ruling, the court offered an overview of how Chapter 20 works and the objections against it. In re Davis, 716 F.3d 331 (4th Cir. 2013).
The court heard appeals brought by the bankruptcy trustees in two Chapter 13 cases. In both cases, the debtors initially filed Chapter 7 petitions and obtained final discharges. A discharge in a Chapter 7 case removes a debtor’s personal liability, but still allows a creditor to collect against any collateral. In both cases, the value of the debtors’ residences was significantly less than the amount of indebtedness secured by the homes. In one case, a home valued at $270,000 had first-, second-, and third-priority liens totaling more than $508,000. The debtors filed Chapter 13 petitions less than four years after their Chapter 7 discharges, seeking to strip the worthless, low-priority liens from their residences. The bankruptcy courts approved the debtors’ requests, and the trustees appealed.
Chapter 13 generally allows stripping of worthless liens against debtors’ homes, but it does not allow a final discharge of debt if the case was filed within four years of a Chapter 7 discharge. 11 U.S.C. § 1328(f)(1). A Chapter 20 proceeding works around this restriction, as the court describes. A court may determine that a low-priority lienholder’s claim is unsecured if the total value of all secured claims is greater than the value of the collateral. 11 U.S.C. § 506(a). Now that the lienholder is an unsecured creditor, the court has the authority to modify their rights, which includes stripping the lien from the property. Davis, 716 F.3d at 335, citing 11 U.S.C. § 1322(b)(2). Continue reading