28 Sep Chapter 20 Lien Stripping Doesn’t Fly In Florida Despite Judge Schermer’s Opinion in In Re: Fisette
As a Consumer Bankruptcy Attorney, I really enjoy explaining the benefits of Chapter 7 Bankruptcy and Chapter 13 Bankruptcy to a potential client. Bankruptcy is a financial planning tool, plain and simple, kind of like a Swiss Army Knife. Inside this one tool, you have many different options.
I enjoy watching their faces light up when they begin to realize the possibilities that they never knew existed. It’s as if the proverbial “light bulb” goes on inside their heads and they begin to see the future as opposed to their current reality which one client compared to a hamster running on a wheel day in and day out.Well, recently, one of our tools was clearly eliminated for the time being, Chapter 20. One of the Southern District of Florida Bankruptcy Judges, the Honorable John K. Olsen, issued a consolidated opinion (September 19, 2011) of In Re: Quiros. In the opinion, Judge Olsen lays out a very strong case as to the reasons why this procedure should not be pursued by debtors. He reviews the cases on both sides of the issue and draws very logical conclusions.
What is a Chapter 20 you say? Well, I’m glad that you asked. Chapter 20 is a Chapter 7 Bankruptcy followed by a Chapter 13 bankruptcy. I know you may be asking yourself why would anyone want to file two bankruptcy cases? Well, there are reasons for everything and sometimes it is beneficial to an individual to file two cases even if they would be ineligible for a discharge in the subsequent Chapter 13.
Under the 2005 amendments to the Bankruptcy Code (BAPCPA), a debtor can file a Chapter 13, after receiving a Chapter 7 discharge, and have the Chapter 13 plan confirmed, despite being ineligible for a discharge, provided that the Chapter 13 plan meets all the requirements for confirmation.
Chapter 20 cases under BAPCPA raise numerous legal issues and Courts around the Country are grappling with this very issue and coming out on both sides of the issue. Recently, my colleague and friend, Craig Andresen, a Minnesota Bankruptcy Attorney wrote about the In Re Fisette decision out of the Eighth Circuit Court of Appeals. Interestingly, the Eighth Circuit Court of Appeals ruled that a lien strip can occur in a Chapter 20 case, even where the debtor was ineligible for a discharge. The Fisette Case is the first ruling on the Chapter 20 lien strip issue from a Federal Appeals Court. The Opinion (issued August 29, 2011) was very well reasoned and written by the Honorable Barry S. Schermer, and his opinion draws the exact opposite conclusion.
In the 11th Circuit Court of Appeals, we have a very interesting situation. Now that the Southern District of Florida has ruled that there cannot be a lien strip of the second mortgage in a Chapter 20 and the Northern District of Georgia has ruled that this can be done, we will have to wait to figure out what the 11th Circuit will say when and if the case gets up to the Appellate Level.
The amazing part of this whole story is that Judge Schermer is now a sitting Bankruptcy Judge in the Middle District of Fort Myers. Yes, this does get interesting doesn’t it. This is the same Judge Schermer who issued the Fisette opinion. So, the $1,000,000.00 question is: How will Judge Schermer rule on the issue when it presents itself in the Fort Myers Divsion of the Middle District of Florida. I don’t know, but I can tell you that from the few time that I have appeared in front of Judge Schermer, I can tell you that he doesn’t make rash decisions. He is very prepared and expects attorneys to do the same. If he rules along the same lines as Fisette, it will be understandable. If he decides that Chapter 20 lien strips will not fly in Florida, I can guarantee you that his opinion and reasoning will be crystal clear.
I hope that I get the opportunity to bring this issue before Judge Schermer. However, this position doesn’t come without risk.
So, what is a Debtor to do in the Middle District of Florida. Well your choices are limited unless you have the funds and the right set of facts to take this case all the way up to the 11th Circuit Court of Appeals. You must work with your attorney to decide what the best course of action will be for your individual circumstances. First, you can file a Chapter 13 from the beginning and attempt to strip the wholly unsecured second and/or third mortgage.
Second, you could file a Chapter 7 first and surrender the home back to the mortgage creditors and see if they are willing to negotiate with you after your discharge. This is not guaranteed and this option comes with the risk of foreclosure so this option needs to be fully explored between you and your attorney.
Third, you could attempt to settle the second mortgage before filing for Chapter 7. In other words, you can offer the second mortgage $1,000 to settle it’s lien. It can’t hurt to ask, and if they say no, let them know that you will be filing bankruptcy and you will be surrendering the home.
Lastly, you could file the Chapter 7 and receive your discharge. Then you can roll the dice and file the Chapter 13. If the Judge follows the Southern District of Florida ruling and denies your plan and rules that there will be no lien strips in a Chapter 20, then you have reason to appeal based upon Fisette. This could be an expensive proposition and should be careful.
Think about this: What if you file the Chapter 7 and recieve a discharge. Then you file the Chapter 13 and attempt to strip the second mortgage and your case is assigned to Judge Schermer. Whoa. Talk about a career decision. What do you do?
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