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Lien Stripping Works Without A Bankruptcy Discharge

By Cathy Moran

Real estate conceptThe waiting and uncertainty is over.  The judges have decided.

Chapter 13 debtors can void underwater junior liens even if they aren’t eligible for a bankruptcy discharge in the Chapter 13 case.

So says the 9th Circuit Court of Appeals in a case called Blendheim, decided October 1.

And so, a myriad of Chapter 20 debtors and title insurers round the circuit heave a sigh of relief.

“Chapter 20” is legal slang for a Chapter 13 case that follows a Chapter 7 case so closely that the debtors don’t get a discharge in the new case.

Bankruptcy courts in many districts have been voiding worthless liens in cases where the homeowner isn’t eligible for a discharge generally since the Great Recession began.

Yet some judges and some scholars questioned whether the law allowed elimination of a lien at the end of a Chapter 13 when the cases concludes without a discharge.

I have tried to imagine the chaos that would be created if the appeals court had ruled that all these lien strips in Chapter 20 cases were themselves void.

The prospect wasn’t pretty.

What’s Chapter 20

A no discharge Chapter 13 came into being with bankruptcy “reform” in 2005.  BAPCPA introduced a rule that a Chapter 13 discharge was only available if the 13 was filed at least four years after an earlier Chapter 7.

More on when you can file bankruptcy again

Often, the debtors still had unfinished business with creditors at the end of a Chapter 7.  Often it was mortgage arrears or non dischargeable taxes, debts that could be addressed and made right in Chapter 13.

Only Chapter 13 offers debtors the chance to strip off a voluntary mortgage lien, and that, only if there is no equity at all that is available for the mortgage lien to attach to.

So Chapter 20’s have abounded.

But we didn’t know whether the change in the availability of a Chapter 13 discharge made in 2005 limited the ability to strip off a lien and voided it at the end of the case.

The court held that the Blendheim’s efforts to save their home through Chapter 13 were done in good faith and a discharge was not required to void a lien.

Hurray.

More on liens and houses in bankruptcy

Is it too late to strip a junior mortgage?

Liens that impair exemptions

Tax liens after bankruptcy

Getting rid of tax liens in Chapter 13

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Filed Under: Chapter 13, Featured, Real property & mortgages

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

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About The Soapbox

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said "try").

Here, I allow myself to tell stories and express strong opinions on how I think law should work for the consumer and small businesses when it comes to debt.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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When Can I File Bankruptcy Again

You can file bankruptcy tomorrow, so long as you don't currently have a bankruptcy case pending. When you can get a discharge in that case is a different story. The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case. My friend Gene Melchionne wrote … Read more

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