Most individuals have heard or read about Chapters 7, 11, or 13 Bankruptcy. With big cities such as Detroit filing Bankruptcy, Chapter 9 Bankruptcy (municipality restructuring) has become a more mainstream term. Chapter 12 Bankruptcy also exists, but is mainly just a form of reorganization for farmers and fishermen. Oddly enough, nowhere in the Bankruptcy code is there anything actually called Chapter 20 Bankruptcy. Although not expressly mentioned in the Bankruptcy Code, Chapter 20 Bankruptcy is a real thing.
Chapter 20 Bankruptcy is a colloquial term given to a situation where a debtor files Chapter 7 and Chapter 13 Bankruptcy back-to-back (7+13=20). It should be noted that Chapter 20 Bankruptcy is not a common occurrence, it’s a unique strategy that we can offer in the right circumstances, particularly for homeowners who owe more than their home is worth. Although most debts can be discharged by filing Chapter 7 Bankruptcy, some debts will remain. Some examples are domestic obligations, tax debts, student loans, and mortgages on your home.
The first step of Chapter 20 Bankruptcy is filing Chapter 7 Bankruptcy. When a debtor files Chapter 7 Bankruptcy, if the mortgage isn’t paid, whether it is your first or second mortgage on your home, the creditor will have the right to foreclose on your home. This foreclosure can take place immediately after the Bankruptcy is completed or if the creditor obtains special permission from the Bankruptcy court. These mortgages remain on your home notwithstanding your Chapter 7 discharge because they are secured obligations against you and the home. Someone who wants to pay the debts financing the purchase of their home in order to keep the property must act quickly if they are behind on their payments. Thus, a subsequent filing of a Chapter 13 Bankruptcy case is taken as the next step in order to reduce that loan amount to the fair market value of the property. This creates an unsecured obligation that is removed from the property with a Chapter 13 Bankruptcy discharge, this is what is known as lien stripping.
An example of Lien Stripping is when a homeowner has a home mortgage principle balance of $125,000, along with a second mortgage of $25,000. The home in this example is currently valued at $100,000 in the market. Although there is not enough equity in the home to secure the second mortgage, it could possibly be stripped or removed as a secured attachment from the home in a Chapter 13 case and instead become an unsecured debt. This is very important because unsecured debts can be restructured in a Chapter 13 payment plan, and are eligible to be discharged once the payment plan is complete.
We often recommend this approach to individuals and families who have a tremendous amount of unsecured debt and who are behind on mortgage payments as well. The goal of Chapter 20 Bankruptcy is to discharge as much debt as possible. When Chapter 7 Bankruptcy is filed and discharge is granted, we can then establish a sustainable repayment plan through Chapter 13 Bankruptcy to help you stay afloat on the debts that survive the initial Chapter 7 Bankruptcy discharge.
Chapter 20 Bankruptcy is a complex strategy because it involves two separate Bankruptcy actions. With the right legal assistance, this strategy can be a viable and beneficial one. Don’t hesitate, pick up the phone and call us at (312) 878-6976 for your free, no obligation consultation!