Understanding Chapter 20 Bankruptcy and Lien Stripping

You’re planning on filing for bankruptcy and you want to find out if chapter 20 bankruptcy with lien stripping is right for you. Before we get into whether it would be the right step for you, it’s important to understand what Chapter 20 bankruptcy is and what lien stripping is.

The Number is a Misnomer

Technically speaking, there is no such thing as a chapter 20 bankruptcy. What a chapter 20 consists of is first filing a chapter 7, followed by filing a chapter 13. This type of bankruptcy is useful when neither a chapter 7 nor a chapter 13 can solve all of the debtor’s problems. Filing a chapter 7 first can reduce your debt significantly, leaving you able to file the chapter 13 to set up payment plans to finish paying the rest of it.

A lien usually refers to a second or third mortgage on your home, also known as a junior mortgage. Lien stripping in chapter 20 bankruptcy is when the debtor is able to strip away or remove a second or third mortgage from their debt entirely. Lien stripping isn’t something a debtor can do in a chapter 7 since the Supreme Court’s ruling in Bank of America N.A. v. Caulkett, but many courts will allow them in a chapter 13.

In order to be able to lien strip, the first mortgage must be more than the actual value of the home itself. For example, if a home has a mortgage of $500,000 and the value of the home in bankruptcy is $450,000, any remaining mortgages or liens can be stripped and the debtor doesn’t have to pay them in order to keep the home. If there is any equity secured by the lien or junior mortgage, lien stripping is not allowed.

Know the Rules Before You Begin

There are a few things you’ll need to make sure you do before you move forward with this type of bankruptcy. The first is to make sure that the court you are filing this in has the jurisdiction to give you this type of relief. The 11th circuit decided on June 18, 2014 that you are allowed to file a Chapter 20.  Also, Jointly owned properties must have both owners file for bankruptcy to strip a lien from a home. If only one owner files for bankruptcy, the property is still encumbered by the junior lien and the property isn’t allowed to be sold until that lien is paid in full.

If your local Court allows Chapter 20 filings to help you lien strip, then the next step is to make sure you know all of the rules involved in this type of filing. It is a good idea to go to the website for the bankruptcy court in your area to research what their guidelines are. This will let you know what kind of paperwork must be filled out, what kind of hearings you’ll have, and more.

One thing that must be done, no matter what court you are in, is to send statutory notice to the lenders that you are seeking to have a lien stripped. You’ll need to make sure to check your bankruptcy procedure rules to find out what proper notice is needed, or have your lawyer do it.

Lien stripping in a chapter 20 case is not actually finished until the pay period for the chapter 13 is finished, which could be anywhere from three to five years. Only after this period of time, based on what is decided at the hearing, will the lien then be removed. It’s a longer process, but can be beneficial if you find a chapter 20 bankruptcy is the right type for you.

If you need help understand what bankruptcy options are right for you, contact the attorneys at Van Horn Law Group.