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Can I File a Chapter 13 to Strip Secondary Mortgage Right After A Chapter 7?

Posted by attorney Mohammed Badwan

A Chapter 7 discharge does not strip liens secured againtst a property. So when a Chapter 7 debtor has 2 mortgages on his property and files a Chapter 7, both mortgages still exist on the property after the Chapter 7 discharge. However, a successful Chapter 13 can strip a lien if it is wholly unsecure (the value of the home exceeds the value of the first mortgage/lien). Once a lien is stripped, the status of the debt changes from secured to unsecured. In most cases, only a portion of unsecured debt is paid in a Chapter 13. The question becomes, can a debtor that just received a Chapter 7 discharge (eliminating all unsecured debt) immediately file a Chapter 13 to strip a wholly unsecured lien. The answer is no in the Northern District of Illinois; since you can not receive a discharge on a Chapter 13 that was filed within the 4 years after the Chapter 7. Courts in the Northern District have ruled that a lien is stripped at discharge and not confirmation of the Chapter 13 plan, thus in order to strip the lien the debtor must be eligible for the discharge. Since the debtor that just filed the Chapter 7 will not be eligible for the discharge they will not be able to strip the lien if they file the Chapter 13 within the 4 year period after the Chapter 7. The Bankruptcy Code restricts how often a debtor can obtain a discharge in order to prevent abuse. If there were no restrictions, a person can file bankruptcy every 6 months and receive a discharge of all of his liabilities. This would discourage creditors from lending to consumers since the consumer can file bankrupty every time significant debt is incurred. Therefore, a debtor that just received a Chapter 7 discharge must wait 4 years to receive a Chapter 13 discharge. Just because the debtor must wait 4 years does not mean they can not file a Chapter 13 within the 4 year period; debtors may still take advantage of the automatic stay that goes in effect after every bankruptcy is filed. Therefore, a debtor who has just received a Chapter 7 discharge can immediately file a Chapter 13 to save his home from foreclosure since the arrears will be paid in full in the Chapter 13 plan and no debt is ever discharged.

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