As discussed in the McNeal posts below, junior mortgage holders are increasingly finding that their mortgages are worth less than the paper they were printed on. Especially troubling to lenders, are conflicting decisions that allow liens, which otherwise would have passed through a Chapter 7 bankruptcy, to be avoided in a subsequent Chapter 13 proceeding.
Since 2000, Chapter 13 debtors have been able to “strip off” wholly unsecured junior mortgages in the Eleventh Circuit. This means that in Chapter 13 cases, not only does the lender lose the ability to go after the debtor’s personal liability on a lien, but the lender also loses its in rem right to foreclose.
After the amendments to the Bankruptcy Code in 2005, debtors could not obtain a discharge in a Chapter 13 case within four years of receiving a discharge in a Chapter 7. Neither the Code, nor the Supreme Court, however, prohibited a discharged Chapter 7 debtor from filing a subsequent Chapter 13. Thus, courts have been left with the question as to whether a discharge is necessary for a debtor to avail themselves of the lien stripping capabilities available in a Chapter 13 proceeding.
Such serial filings are known as “Chapter 20” proceedings, and Florida judges, even within the same districts, are split down the middle as to whether a discharge is necessary in a subsequently filed Chapter 13 to strip off the debtor’s in personam liability which passed through the previously discharged Chapter 7 case.
Although courts have not foreclosed Chapter 20 relief to debtors, there is good news for lenders. Across the nation judges are firmly split as to whether a Chapter 13 discharge is necessary. The second piece of good news is that all judges, even those who do not require discharge, and therefore allow lien stripping in Chapter 20 cases, require that a debtor meet specific good faith requirements when entering into a Chapter 20 proceeding.
As long as McNeal remains controlling law in the Eleventh Circuit, Chapter 7 debtors will not have to turn to Chapter 20 to strip off wholly unsecured liens. However, lenders should not grow complacent in regards to Chapter 20 proceedings, because such proceedings may ultimately provide relief to Chapter 7 debtors, even if McNeal is overturned.