Chapter 20: San Diego Bankruptcy Court allows Lien Stripping in Chapter 13 after Chapter 7.

21 Jun Chapter 20: San Diego Bankruptcy Court allows Lien Stripping in Chapter 13 after Chapter 7.

The Southern District of California Bankruptcy Court in San Diego recently issued a ruling that allowed a junior lien to be removed in a Chapter 13 case, even though the debtor was not eligible to obtain a discharge. Discharge was not available since the debtor previously filed a chapter 7 petition and the new bankruptcy laws prevented a subsequent discharge within 8 years of that filing in another chapter 7 or 4 years in a chapter 13. Nevertheless, repeat filings without discharge are possible and often referred to as “chapter 20” cases. Despite NO DISCHARGE, liens can still be eliminated in these cases!

The case of In re Bollerud, 08-12177 now sets the path for future “chapter 20” cases to be filed in San Diego County. However, “chapter 20” cases are not home free yet, at least in this district. This case was unique, in that although the underlying second deed of trust could be eliminated, other issues remain and the decision was based on uncommon facts. Thus, six (6) issues have surfaced with respect to this case:

1) The lien still remains with respect to the spouse;

2) The holding implies that chapter 20 cases no longer proper if eligibility issues under 109 exist(those that deal with the debt limits of chapter 13). It should be noted, however, that such an implication, directly contradicts other cases that hold just the opposite and allow chapter 20 to be used solely to overcome such 109 issues (See In re Cushman, 217 B.R. 470, (Bankr. E.D. Va. 1998) at 477);

3) The holding does not address what happens in above 0% plans. Cases throughout the nation seem to suggest that these unsecured creditors have claims against the estate and not the debtor due to prior discharge, and would receive dividends;

4) There appear to be additional tasks required with ex parte motions at the end of the case to finalize the lien removal;

5) The holding suggests a different result might occur if the creditor objects to confirmation or the valuation motion. In this case, it was inferred that the creditor with the lien was deemed to have consented to lien removal;

6) The holding suggests a different result might occur if the first mortgage had no arrears and there was no other purpose for the subsequent chapter 13.

Thus, the case has a very narrow holding based upon unique facts and will apply to very few cases. Nevertheless, this author has additional cases under consideration in the Southern District of California Bankruptcy Court by different judges. These judges may publish their opinions as opposed to this unpublished ruling and may rule differently. Stay tuned.

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