Chapter 20 Bankruptcy: A Viable Option for Underwater Homeowners

You will not find Chapter 20 in the bankruptcy code. But, this unique bankruptcy strategy can offer the consumer a tremendous benefit under the right circumstances, particularly for homeowners who owe more than their home is worth. Chapter 20 bankruptcy is the colloquial term used to describe filing for Chapter 7 bankruptcy, and subsequently filing for Chapter 13 bankruptcy (7 + 13 = 20). It is most frequently associated with removing unsecured second and third mortgages from people’s homes, also known as lien-stripping. Although some jurisdictions frown upon Chapter 20 bankruptcy, the majority of California Courts permit it. Many individuals have had success using a Los Angeles bankruptcy law firm to complete their Chapter 20 bankruptcies and successfully strip second mortgages and other liens with highly favorable results.

Why Chapter 20 Bankruptcy?

Bankruptcy laws are designed to provide debt relief and to protect your important assets from creditors. Different chapters of the bankruptcy code are tailored to meet the individual needs of the person or entity filing for bankruptcy and accomplish debt relief goals through different mechanisms.

For consumers, Chapter 7 and Chapter 13 are the most common forms of bankruptcy. Chapter 7 bankruptcy can help consumers receive a discharge of many types of debt, particularly unsecured debt (like credit card debt) in a relatively short timeframe. Chapter 13 bankruptcy, on the other hand, centers around a three to five-year court-approved repayment plan. Certain debts may also be reduced or eliminated in the course of a Chapter 13 bankruptcy. This includes extending the terms of a car or installment loan and even paying off IRS debt without further penalties or interest.

Beyond the timeframe, there are other important distinctions between Chapter 7 and Chapter 13 bankruptcy. While there is some overlap, one difference that can make Chapter 20 bankruptcy attractive is that Chapter 7 and Chapter 13 apply to a slightly different range of debt types.

When someone receives a discharge of debts under Chapter 7, a second or third mortgage on your home remains, because it is a secured obligation against you and the home… even if the home has no equity to support these mortgages. However, a subsequent Chapter 13 case can result in the reductions of that loan amount to the fair market value of the property thus creating an unsecured obligation that is removed from the property with a Chapter 13 discharge.

Lien stripping is the process of removing debts that are attached to assets when there is no equity in the asset to secure the underlying debt. For example, imagine a homeowner who has a home mortgage principal balance of $150,000, in addition to a second mortgage with a balance of $50,000. However, after a real estate market crash, the home securing both mortgages is valued at only $100,000. There is not enough equity in the home to secure the second mortgage; therefore, under the right circumstances, it could be stripped or removed from attachment to the home in a Chapter 13 case.

Lien stripping can transform secured debts on your personal or real property into unsecured debts, an important distinction in the bankruptcy context. Unsecured debts can be restructured under a Chapter 13 repayment plan, and are eligible for complete discharge under the right circumstances.

So why bother with Chapter 20 bankruptcy? The goal of Chapter 20 is to get rid of as much debt as possible in a Chapter 7 case, then to establish a realistic repayment plan through Chapter 13 that can help consumers keep their heads above water on debts that survive the Chapter 7 discharge. Oftentimes the common bankruptcy practitioner is not aware that a Chapter 13 may be more beneficial than the simple Chapter 7 bankruptcy. The lien stripping feature of Chapter 13 is an added bonus that helps consumers tackle certain debts that may have been untouchable in Chapter 7 bankruptcy.

Get Legal Help With Your Chapter 20 Case in California

Although any bankruptcy case can be a complicated undertaking, a Chapter 20 bankruptcy can be particularly complex because it involves two separate bankruptcy actions. There are hurdles that anyone going through Chapter 20 must overcome, such as statutory time restrictions for subsequent bankruptcy debt discharges and a judges’ potential skepticism towards consumers who commence a Chapter 13 case on the heels of the their Chapter 7 discharge. Yet, with the right legal assistance, these obstacles can be overcome.

Chapter 20 provides multiple layers of debt protection that cannot be achieved in either Chapter 7 or Chapter 13 bankruptcy alone. Of course, these protections come with tradeoffs, and Chapter 20 is not for everyone. But if the situation is right, a Chapter 20 can save you thousands in the long run.

Get your financial life back on track as soon a possible. If you are underwater on your mortgage or have other pressing financial concerns, contact a Los Angeles bankruptcy lawyer today to begin exploring the full range of debt relief options at your disposal.