You may remember that one of my first blogs dealt with the debt limits in a Chapter 13 bankruptcy and how those debt limits precluded some Bay Area residents from receiving the bankruptcy help they needed in order to save their home from foreclosure. The amount of people’s mortgages coupled with their credit card, medical and tax debt, often times put them over the debt limits and knocked them out of Chapter 13 eligibility. This in turn took away their ability to repay mortgage arrears through a Chapter 13 plan or strip off a second mortgage in a Chapter 13 bankruptcy. Unfortunately, without the protections of bankruptcy, many people who found themselves in this situation often lost their homes to foreclosure.

In a recent turn of events, two Oakland Bankruptcy Judges have issued opinions that go a long way in easing the burden of Chapter 13 debt limit restrictions. Judge Efremsky and Judge Lafferty of Oakland have recently decided that debtors may file what is called a Chapter 20 bankruptcy and strip off a second mortgage in the process. You can read the opinion of Judge Efremsky here.

Now, there really is no such thing as a Chapter 20 bankruptcy. It is just a figure of speech attorneys use to describe the situation when a debtor has filed a chapter 7 bankruptcy, received a discharge and then filed a chapter 13 bankruptcy less than four years from the date the chapter 7 was filed. Seven plus thirteen equals twenty and that’s where the term chapter 20 comes from.

A debtor in a chapter 20 is not entitled to a discharge of their debt because in order to receive a discharge in a chapter 13 filed after a chapter 7, the subsequent 13 must be filed more than four years after the petition date of the 7.

The fact that debtors in a chapter 20 are not entitled to a discharge has created a conflict when they attempt to strip of a second mortgage in their bankruptcy. In order to strip a second mortgage you must be able to show that the value of your home is less than first mortgage on your property. This is not where the conflict arises however. The conflict occurs because of the language of § 1325(a)(5)(B)(i)(I) which requires that the plan provide for the holder of an allowed secured claim to retain its lien until the earlier of the payment of the underlying debt or discharge under § 1328; and § 1325(a)(5)(B)(i) (II) which provides for retention of a lien if a case is dismissed or converted without plan completion.

The courts in both cases found that 1) the second mortgages in these chapter 20’s were not holders of allowed secured claims and therefore § 1325(a)(5)(B)(i)(I) and (II) did not apply and; 2) that nowhere in the code does it state that plan confirmation or the ability to strip of a second mortgage is conditioned upon the eligibility of the debtor to receive a discharge.

So how does this help you keep your home? Well, if you are in the situation I described above and are over the chapter 13 debt limits you could first file a chapter 7 bankruptcy and discharge all of your personal liability on both your secured and unsecured debt. Although your personal liability has been discharged, the liens against your property remain. However, your second mortgage may be modified in a chapter 13. Now free of the personal liability that was excluding you from a chapter 13, the debt limitations are no longer a concern and you may now file and strip off a second mortgage in your chapter 13 after first getting rid of your personal liability in a chapter 7. Being able to get rid of a second mortgage can often make the difference between saving your home and letting it go to foreclosure.

Chapter 20, the made-up bankruptcy, is now offering some very real solutions to people with high debt and no equity in their homes.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code