"CHAPTER 20 BANKRUPTCY" AND LIEN STRIPPING: CAN IT BE DONE?
How's a Chapter 13 Bankruptcy a maraschino?
Circumstances may compel a debtor to file a bankruptcy under Chapter 7 of the Bankruptcy Code, get a discharge (release or forgiveness) of debts, then without delay file bankruptcy again posthaste: this time-round under Chapter 13 of The Code. This sequence of events attracts bankruptcy debtors eligible for Chapter 7, who would gather additional benefit by topping it off with a Chapter 13 payment plan. For instance, if you filed Chapter 7 to discharge your credit card debt, but remain in foreclosure, then a subsequent Chapter 13 can catch you up on your mortgage arrears by distributing their payment (generally interest-free) over up-to 60 mos. Pretty nifty.
Other reasons motivate the filing of a Chapter 13 Bankruptcy upon the heels of a Chapter 7 Bankruptcy, beyond payments of arrears. One such reason is to extend the period for payment on non-dischargeable debts (debts that can't be canceled, but can be paid-for within the "controlled environment" of chapter 13). E.g.: one may be taxed with $1000/mo. back-tax payments pre-chapter-13, yet be able to reduce the payments to a more-tenable $150/mo.-Chapter-13 Plan. (Payment amounts vary heavily.)
Another very-frequent motivation for Chapter 13 Bankruptcy is to strip off (think of that phhhhhhhhhhhhhhit velcro-peeling sound) a second mortgage (which is a voluntary lien) if it's been rendered wholly unsecured by virtue of the collateral's depreciation (e.g.. if your first or primary mortgage payoff is now higher than the home's value).
Yet, why would the debtor not file the Chapter 13 Bankruptcy to begin with? Multiple reasons compel this behavior.
First, one may demonstrate one's math skills by cleverly dubbing the maneuver a "Chapter 20" Bankruptcy. There is no 20th chapter to the Bankruptcy Code. The esoteric coinage of 20 is the sum of bankruptcy chapters 7+13.
Second, a chapter-13 discharge is up to 5-years in the making; whereas a chapter-7 discharge is quick: 3 months is the common turnaround in San Diego. Sometimes one's not eligible for a chapter 7 bankruptcy, and by default opts for chapter 13. Yet, if one's eligible for both chapter 7, one may want it both ways: a quick chapter-7 fix complete with the satisfaction of discharge; to be followed by a strategic chapter 13 meant to strictly cure arrears, extend payments on non-dischargeable debts, or strip a lien.
The catch is that a chapter 20 does permit one to cure arrears--by paying them off over time, or to extend payments on non-dischargeable debts; yet, the chapter 20 may not permit a lien strip. Apparently.
Per United States Code Title 11 section 1328(f)(1), if one files a chapter 13 bankruptcy within 4-years of filing a chapter 7 bankruptcy (that had concluded in discharge)--such a chapter 13 is what we refer to as a chapter 20--then one cannot obtain a discharge in that chapter 13. Discharge is the result of a normal chapter 13 plan; it translates to forgiveness of the balance of one's dischargeable debt, after having typically made payment of a fraction of one's debt.
In a chapter 20, payment of arrears or payment of priority (non-dischargeable) taxes* does not require a discharge, because it does not entail debt-cancellation (pursuant to paying pennies on the dollar). However, it's been assumed that a lien strip IS contingent upon a discharge. It would follow that a Chapter 20 cannot conclude with a lien strip or removal of a wholly unsecured second mortgage (unless you pay it off in full during the plan; which ain't gonna happen).
The viability of a chapter 20 lien strip has been contested in a chapter 13 case originating in the US Bankruptcy Court for the Southern District of CA (the San Diego Bankruptcy Court). The case in question: In re Victorio or Victorio v. Billingslea (10-07125-LT13; 454 B.R. 759). Therein, the debtors had contested the Chapter 13 Trustee's successful objection to confirmation of their chapter 20 lien-strip gambit. The debtors appealed to the US District Court whose decisive ruling was issued February 24, 2012. [The chapter 13 bankruptcy-filing of Mr. and Mrs. Victorio had been filed... April 28, 2010 or 667 days previously. This duration also translates to 16,008 hours, though only some of which were billable by counsel.]
In its decision, the District Court concluded that a chapter 20 lien strip effects an impermissible de facto discharge that would circumvent the Congressional intention that underlies 11 USC §1328(f)(1). What this mouthful means is that you can't strip a voluntary lien without an actual discharge (and to reiterate--because this is bizarre stuff--you can't get a discharge if you file your chapter 13 within 4-years of a chapter-7 filing, which had ended in discharge). The Court reasoned that had Congress intended to permit a chapter 20 lien strip without a discharge, then it would have explicitly said so. Of course, Debtors might argue, that had Congress intended to disallow a chapter 20 lien strip, it would have said so, too.
In conclusion, if you're looking to strip, you may not wanna mess around with mathematics by adding 13 to 7. It may be advisable to roll Lucky Chapter 13 Bankruptcy from the start. At least till Victorio's decided on appeal to the 9th Circuit Court of Appeals (whose determination would constitute an appeal of an appeal). It's not everywhere one encounters so much ado about stripping.
In conceiving this essay (lofty word), I wished to insert somewhere an expository distinction among definitions of "discharge," lest the unsuspecting reader confuse the subject of this palaver with thoughts on the likes of pus or other things that "pour forth, emit, or secrete." Yet, my editor insisted that discharge is so obviously intrinsic to the bankruptcy context, that pus merited no special need for mention. She also added that that would be gross.
San Diego Bankruptcy Attorney, Asaph Abrams.
Offering free, no-obligation bankruptcy consultations in San Diego. Visit us at http://www.bankonitsd.com/ or call 858-344-0500. E-mail [email protected] to set an appointment. Also representing Imperial County residents.
The above is general information, not legal advice to be relied upon. It may be pertinent to the Southern District of CA only and its relevancy is subject to change due to that whole due process and appealability thing.
*Some taxes are considered non-priority and are thus dischargeable (i.e. you can get rid of em in a chapter 7 or not be required to pay them off in full in a chapter 13)