Chapter 20 Bankruptcy?

   Yes, but you won’t find it in the code. Not all bankruptcy judges will allow it, and certainly not in all circumstances. It refers to the situation where a debtor is ineligible to file a Chapter 13 due to the nature and amount of debt or a chapter 20 is simply determined to be the debtor’s best course of action. The debtor therefore files a Chapter 7 to discharge his unsecured dischargeable debt. After the discharge is granted, the debtor files a Chapter 13 to reorganize remaining debt obligations. Hence the name: 7 + 13 = 20.

   The debtor’s purpose and good faith are critical to approval of a Chapter 13 plan, filed on the heels of a Chapter 7 discharge. Valid bankruptcy purposes have been held to include: to address arrearages and outstanding liens on a primary residence or other real property; to pay priority tax claims over time; and lien-stripping of a second or third mortgage, especially when combined with other valid bankruptcy reasons for reorganization.

   A chapter 20 is not for the faint of heart. It has only recently gained wider acceptance in Los Angeles after the decision in In re Frazier and Judge Tighe’s reconsideration of her position as reported in Central District Insider. Judge Tighe had previously denied lien avoidance motions in chapter 20 cases on the ground that chapter 20 debtors were ineligible for discharge. The view was shared by most judges in Los Angeles, i.e., that discharge was the event which triggered permanent lien avoidance.

   In a reversal from her previous position, Judge Tighe held it was not discharge, but completion of plan payments, which triggered lien avoidance. “Once the payments are complete, ‘the provisions of the plan become permanent, and the lien avoidance is, similarly, permanent.’”

   The reconsidered position is good news for debtors whose homes are underwater in Los Angeles. Unfortunately, debtors still face a very high hurdle. In order to strip a junior lien, debtors must prove it is wholly unsecured. For the stripping to be permanent, debtors must complete their plan payments.

  I consult with clients and accept cases involving debtor and creditor issues, including those arising under Chapters 7 and 13 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. For other types of cases I accept, please scroll my “Home” and “My Practice” pages. If you are seeking a legal consultation or representation, please give me a call at 818.971.9409. – Michael Daymude

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