The wait is over; the decision is in.
Homeowners in the 9th Circuit can strip off underwater mortgages in Chapter 13 cases even when they aren’t entitled to a bankruptcy discharge, the 9th Circuit BAP has held.
Thus, courts have taken another step in the building consensus that the debtor doesn’t have to be eligible for a Chapter 13 discharge in order to use Chapter 13 to eliminate an entirely underwater mortgage.
Lien strips in Chapter 20
Voluntary liens can be stripped off the debtor’s real estate only in a reorganization chapter of bankruptcy: Chapter 11 or Chapter 13. And since bankruptcy “reform” in 2005, you can’t get a discharge in a Chapter 13 case filed less than 4 years from a previous Chapter 7 case.
You aren’t barred from filing a Chapter 13 right after a Chapter 7. It’s just that any debts that survived the Chapter 7 don’t get discharged in the no-discharge Chapter 13.
In bankruptcy slang, we call it a case of Chapter 20: a Chapter 7 plus a Chapter 13.
Chapter 20 cases are useful for curing mortgage defaults or paying taxes or support that isn’t dischargeable in Chapter 7. But it was undecided, until now, whether a mortgage lien that was “out of the money” with respect to the value of the property could be stripped off in a Chapter 20.
A basic of bankruptcy law is that liens pass through bankruptcy undisturbed, unless the bankruptcy court, pursuant to some code section, ordered otherwise.
Thus, some argued, that the discharge was the essential element that voided the lien upon plan completion. Without eligibility for a discharge, could a mortgage lien be voided.