For example, you could file for a second Chapter 7 bankruptcy at any time after receiving discharge for the first, but you won’t get another discharge unless it’s been at least eight years from the date of the most recent discharge. There might be some cases in which it’s beneficial to do so anyway (to obtain an automatic stay, for example), but usually there is a better, less costly, way to go about it.
Our Maryland Chapter 7 bankruptcy attorneys know successive bankruptcy cases must be handled with special care because there are many potential pitfalls. This doesn’t mean it’s not worth it, but strategic planning will be critical to maximizing the financial benefit for the debtor, given the complex nature of such proceedings.
In the recent case of In re: Cain, the Bankruptcy Appellate Panel for the Sixth Circuit was tasked with determining whether a Chapter 13 discharge filed within four years of a Chapter 7 discharge was allowable. (Four years is the time one must wait when obtaining a Chapter 13 discharge after a Chapter 7 discharged; If the order is reversed, the wait is six years.)
Specifically, the debtor wished to strip a wholly unsecured, inferior mortgage lien on her primary residence in the Chapter 13 less than four years after having obtained a Chapter 7 discharge. (This is what is sometimes known as a “Chapter 20,” though there is no formal “Chapter 20” in the bankruptcy code.) This is an issue that is arising more and more, as individuals are seeking to free themselves from the burden of “underwater” properties (meaning homeowner owes more on the home than what it’s worth).
For the court’s purposes, the case started in February 2008, when the debtor’s first Chapter 7 petition for discharge of debts was granted. In July 2008, just five months later, the debtor filed for Chapter 13 protection in order to pay an outstanding vehicle loan and tax obligations, as well as to cure the default on a first mortgage and avoid a wholly unsecured second mortgage on her home.
The amended Chapter 13 plan, dated in August 2008, was confirmed the following month, and included a provision to allow her to avoid paying, for a time, the mortgage and/or judgment liens that were wholly unsecured (the second mortgage). Further, the creditor was barred from making a claim for those debts in the Chapter 7 case.
Because the Chapter 7 discharge was obtained less than four years earlier, the debtor wasn’t eligible for discharge in her Chapter 13 case. Therefore, once the debtor completed her other payments under the plan, the trustee in the Chapter 13 case filed a motion to close the case without discharge, and it was granted in May 2013. Shortly after, the debtor filed another motion to avoid the second, unsecured lien on her home.
This motion was denied because, as the bankruptcy court held, she was ineligible for discharge because of the close timing of her bankruptcy filings.
Upon appeal, the appellate panel noted that two other circuits and one bankruptcy court had allowed liens with no value to be stripped, regardless of the debtor’s eligibility for discharge. However, other courts have found differently, finding this amounted to a “de factor discharge.”
The Sixth Circuit BAP found that while filing a Chapter 13 less than four years after a Chapter 7 makes the debtor ineligible for discharge of further debts, it doesn’t prevent the debtor from seeking relief. Further, the panel ruled there is nothing in the bankruptcy code that prevents a “Chapter 20 debtor” from stripping wholly unsecured junior liens on the debtor’s primary residence.
The court noted that the second lien in this case, valued at nearly $10,000, technically had no value because the amount owed under the first mortgage exceeded the value of the property, making the claim by the second mortgage holder “unsecured.” That meant it couldn’t be treated as a secured claim, and the holder was not entitled to protection until the debt was paid off or discharged.
Therefore, the panel ruled, the bankruptcy court erred in denying the debtor’s motion to avoid the second mortgage lien.
We may still see a variation on this issue within the courts from circuit to circuit. However, this case further strengthens legal precedent that protects the interests of debtors.
Contact Harris S. Ammerman, bankruptcy attorney serving Washington D.C., Maryland and Virginia, by calling (202) 638-0606.