A cry of relief went up in Oakland in October 2012 as consumer bankruptcy lawyers practicing in the Northern District of California saw Judge Efremsky give his blessing to a controversial Chapter 13 bankruptcy situation.
This Chapter 13 bankruptcy, filed soon after a Chapter 7 discharge is issued, is filed solely for the purpose of stripping an underwater second mortgage from a debtor’s primary residence. Combine 7 and 13, and you get a Chapter 20 bankruptcy.
Let’s dissect the issue for those who live up in the Northern District of California.
Second Mortgages In Chapter 7 vs. Chapter 13 Bankruptcy Cases
In Chapter 7 bankruptcy, you cannot turn a second mortgage into a regular unsecured debt. In Chapter 13, however, you can do just that – provided that your first mortgage eats up all of your equity.
For that reason, lots of people choose to file a Chapter 13 bankruptcy. In California where so many houses are underwater, jettisoning a second mortgage payment in a Chapter 13 can free up a significant amount of money each month. But when there’s too much other debt at issue, there are times when a Chapter 13 bankruptcy isn’t feasible.
Enter Chapter 20 Bankruptcy
Chapter 20 bankruptcy is a Chapter 7 case followed by a Chapter 13. The first case results in a discharge of unsecured debt, leaving only the underwater second mortgage to worry about. The personal liability for repayment of the second mortgage is discharged in the Chapter 7, so all that’s left is to get the lien released through a process called lien stripping.
Competing Positions On Chapter 20
The arguments for and against permitting lien stripping in a Chapter 20 context are legion. Competing views show up in In re Victorio, 454 B.R. 759 (Bankr. S.D. Cal. 2011), aff’d 470 B.R. 545 (S.D. Cal. 2012), In re Gerardin, 447 B.R. 342 (Bankr. S.D. Fla. 2011) (against allowing it), and In re Tran, 431 B.R. 230 (Bankr. N.D. Cal. 2010), In re Hill, 440 B.R. 176 (Bankr. S.D. Cal. 2010), In re Okosisi, 451 B.R. 90 (Bankr. D. Nev. 2011), In re Scantling, 2012 WL 593218 (Bankr. M.D. Fla. 2011), and In re Fisette, 455 B.R. 177 (8th Cir. BAP 2011) (in favor of allowing it).
As you can see, the California bankruptcy courts aren’t of a single mind on the issue. That’s why Judge Efremsky’s decision in In re Truong, Chapter Case No. 11-73404 (Bank. N.D. Cal. 2012) is so important – it’s not only a victory for Oakland consumer debtors and their lawyers, but also moves California as a whole in the right direction.
Note that I don’t practice law in the Oakland area – for that you need someone like Cathy Moran. Though this decision isn’t binding on the Los Angeles bankruptcy courts, it’s a step in the right direction. It adds another card to the deck, helping to balance out the decisions that swing the other way.
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