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Lien Stripping In Chapter 13 Bankruptcy: Is There Really A Chapter 20?

Wednesday, September 14th, 2011

Bankruptcy practitioners sometimes refer to Chapter 20 bankruptcy. A Chapter 20 bankruptcy is when an individual files a Chapter 7 bankruptcy to liquidate debts and then files a Chapter 13 bankruptcy to strip liens on his home.

There has been some significant litigation related to Chapter 20 bankruptcies. If the Chapter 13 is filed within four years of the Chapter 7, the debtor is not entitled to a second discharge. The issue being argued in our court system is whether someone who is not entitled to a second discharge can still use the protections of Chapter 13 to catch up mortgage payments and strip unsecured/underwater mortgage liens.

A recent decision from the Eighth Circuit Bankruptcy Appellate Panel* has come down in support of the Chapter 20 strategy. The court held that even though the debtor was not entitled to a Chapter 13 discharge, he could strip the unsecured mortgage liens and pay them as unsecured creditors. Unsecured creditors receive a percentage of the money owed over the course of the plan. The court further stated that section 1325(a)(5)(B) only applied to secured creditors and thus the junior lien holders could not block the confirmation of the Chapter 13 plan.

This is good news for home owners seeking to restore some equity in their homes while also getting rid of their other debts.

* In re Fisette, No. 11-6012 (8th Cir. BAP Aug. 29, 2011),

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