2nd Mortgage Avoidance in Chapter 20
Traditionally, debtors have had the opportunity to remove or “strip” a second mortgage from their home or rental property through a chapter 13 bankruptcy petition and plan. Debtors may strip their second mortgages from their home if they can demonstrate that there is no equity beyond the first mortgage that the second mortgage to attach to. If the Debtor can prove that the second mortgage is completely unsecured, it can be removed, provided the Debtor is able to complete their chapter 13 plan obligations – i.e.: make their proposed plan payment for each of the 36 or 60 months required under their chapter 13 plan.
Debtors may also strip a second mortgage from their property by means of a “Chapter 20 Bankruptcy,” which is a chapter 7 and chapter 13 together. A chapter 20 bankruptcy is accomplished when a Debtor files a chapter 7 bankruptcy petition and receives a discharge of their debt, then files a subsequent chapter 13 petition and plan. The chapter 13 plan is often only made up of secured creditor debts (car payments, mortgages, etc.) and any arrearages on secured debts, most of the time a mortgage. The chapter 13 allows the debtor the opportunity to receive protection from the bankruptcy court while bringing their mortgage current. Protection can be needed if the debtor is facing foreclosure or garnishment of their wages or bank account.
The only hurdle to a successful outcome in a chapter 20 bankruptcy is the timing upon which the chapter 13 is filed after the chapter 7. Debtors filing a chapter 13 petition may only receive a discharge of their debt if their chapter 13 petition is filed more than four years after the filing of their chapter 7 petition was filed. Many courts in the past have found that the lien stripping action in the subsequent chapter 13 must be contingent upon the issuance of a discharge in the debtor’s chapter 13. So, by deductive reasoning, it would be safe to conclude that if a Debtor who files a chapter 13 petition within four years of their chapter 7 petition, they could not strip the second mortgage from their home due to the fact that they cannot receive a discharge.
But a case in the United States Bankruptcy Court for the Ninth Circuit could ultimately rule that the stripping of the lien from the debtors property is only contingent upon successful completion of the debtor’s chapter 13 plan, and not upon the issuance of a discharge. The case is Litton Loan Servicing v. Robert Blendheim, Ninth Circuit No. 13-35354. For additional information on this case, and other similar cases in other circuits, you can go to http://www.ncbrc.org/
This a potentially ground-breaking ruling, with beneficial consequences for those debtors that have received a chapter 7 discharge within the last four years. If you have a second mortgage that has no equity beyond the first mortgage, you may be able to strip that lien in a chapter 13 bankruptcy. If this is you, it’s time to talk with a bankruptcy attorney right away.
Jared Bellum is a contributing author to this blog and has been admitted to practice law in the state of Washington. He practices in the fields of bankruptcy, real estate law, business law and estate planning.