Wednesday, March 23, 2011

2nd Mortgage Lien Stripping Still Viable In "Chapter 20" Bankruptcy Cases???

In an apparently unsettled area of law, a recent ruling from a U.S. Bankruptcy Court in Michigan addressed the appropriateness of a debtor having two bankruptcy cases pending at the same time where a so-called "Chapter 20" bankruptcy(1) is involved (where a homeowner first files a chapter 7 to relieve himself of unsecured debts, followed by a Chapter 13 to "lien strip" a completely underwater second mortgage lien from his home in order to save it from foreclosure - ie. Ch.7 + Ch.13 = "Ch.20").

The relevant excerpt from the ruling follows (bold text is my emphasis):
  • There are cases, not mentioned in Debtor's brief (Docket # 16), holding that there is a per se rule that a bankruptcy debtor may not have two bankruptcy cases pending at the same time. These cases purportedly state the "majority view," and at least one of these cases is directly on point with this case. See, e.g., In re Sidebottom, 430 F.3d 893, 898-99 (7th Cir. 2005); In re Lord, 295 B.R. 16, 18-21 (E.D.N.Y. 2003); Turner v. Citizens National Bank of Hammond (In re Turner), 207 B.R. 373, 378-79 (B.A.P. 2d Cir. 1997). (Of these cases, In re Lord is directly on point.)

    But the Court is persuaded by contrary cases, including Grimes v. United States (In re Grimes),
    117 B.R. 531, 533-37 (B.A.P. 9th Cir. 1990) and In re Ragsdale, 315 B.R. 691, 693-94 (Bankr. E.D. Mich. 2004), that the better view is that such a per se rule is not correct, at least in the specific circumstances of this case.(2)

    Those specific circumstances are: a Chapter 7 debtor obtains a discharge in his Chapter 7 case, but then, while that case remains open only for the Chapter 7 Trustee to investigate and possibly administer assets of the Chapter 7 estate, the debtor files a new bankruptcy case under Chapter 13, in an effort to treat the first and second mortgages on his residence through a Chapter 13 plan and a lien-strip action, and thereby save his residence from foreclosure
    .

I don't know what to make of this ruling - maybe it's nothing, but I'm sure there's someone out there who can figure out a way to make a big deal out of it.

For the ruling, see In re Smith, No. 11-45460 (Bankr. E.D. Mich., Southern Div. March 15, 2011).

(1) See generally:

(2) See also, In re Bollerud, No. 08-12177 (Bankr. S.D. Cal. 2009), where a U.S. Bankruptcy Court in San Diego, California OK'd a so-called "Chapter 20" in a 2nd mortgage lien stripping case where the debtor sought only to void the lien on the home without also seeking a discharge of the underlying debt.

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