Mortgage lien stripA very recent opinion from the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) establishes the legitimacy of something I have been doing in Chapter 20 cases.  It’s nice to know I was right all along.  This post brings you up to speed on the good news for debtors in the BAP case.  A bit of background will help to put the case into its proper perspective.

If you are new to bankruptcy practice, and have given the Bankruptcy Code a cursory glance, you might think I am out of my mind referring to a Chapter 20 bankruptcy in the tile to this post.  After all, the Code doesn’t even have a Chapter 20.  (Whether or not I am out of my mind is best left to the many voices in my head to determine.  What did you say?  Are you calling my dog a liar?)  The term, “Chapter 20” is used by bankruptcy attorneys to refer to a Chapter 7 followed by a Chapter 13.  Since 7 + 13 = 20, Chapter 20 is used as a short hand.

I.  Reasons For Doing A Chapter 20

Since Chapter 7 discharges most debts without the debtor having to make any payments to creditors, why would anyone want to do a Chapter 20?  One reason lies in 11 U.S.C. § 109(e)’s debt ceilings (I have corrected the dollar amounts, which haven’t been updated at the linked site for quite some time.):

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.

Based on this Code section, if a debtor has more than $383,175 in noncontingent (i.e., doesn’t depend on a triggering event for its validity), liquidated (i.e., the dollar amount of the debt is certain), unsecured (i.e., there is no collateral securing the debt) debt, then Chapter 13 is unavailable.

Since Chapter 7 has no debt ceilings (though it does have income ceilings, which can be made precise using 11 U.S.C. § 707(b)), the debtor can first do a Chapter 7 to get rid of as much unsecured debt as possible, and then do a Chapter 13 to deal with debts that weren’t discharged in the prior Chapter 7, or to catch up on a delinquent mortgage.
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Chapter 13 bankruptcy has an important limitation.  If the debtor’s debts are too large, Chapter 13 is unavailable:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175  and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.

11 U.S.C. § 109(e).

By the way, the numbers at the Cornell Law School site to which this links haven’t been updated for some time.  I corrected them in the quote above.  The modified quote is correct as of September 2014.

If either debt ceiling — either the secured, or unsecured — is exceeded, the debtor is ineligible for Chapter 13 protection, and must consider Chapter 11 bankruptcy.  This leads to the following question that was posed by a fellow bankruptcy attorney:

Question:

Suppose a debtor has a mortgage — for simplicity let’s say a first mortgage — that is undersecured, i.e., the value of the house is less than the current balance on the mortgage.  Does the unsecured portion of the mortgage count toward the $383,175 unsecured debt ceiling?

My answer was:  It depends on whether or not the house is the debtor’s principal residence.  But it’s a bit more complicated than you might imagine.  Let’s start with the simpler “nonprincipal residence” scenario.
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Home equityLast Sunday, July 20, 2014, Liz Weston of the L.A. Times gave an interesting answer to a question posed by a reader of the newspaper’s Money Talk feature.  Today’s post adds to Liz’s advice.

The reader had accumulated $28,000 in credit card debt over the previous eight years, and had considerable law school debt and a home mortgage.  He wanted to know whether a home equity loan was a smart choice to solve his problems.

Liz gave a good answer, but the LA Times’ space constraints made it impossible for her to cover things in detail.  Her response included the statement:  “Bankruptcy probably isn’t in the cards for you, of course, given your resources.”  This led me to today’s post.

But first, a caveat:  In order to give the reader an accurate analysis of the application of bankruptcy to his problems, I would need a lot more information.  Thus, what I am about to say focuses on general principles, and is not a substitute for a thorough evaluation of the case using detailed documentation.

I.              Chapter 7 Bankruptcy

I suspect that Liz had Chapter 7 bankruptcy in mind when she made her comment.

In a Chapter 7 bankruptcy, the debtor’s dischargeable debts are discharged without the creditors getting anything.  Since this is such a big hit on the creditors, there are some limitations.  One such limitation is on what the debtor gets to keep.  The debtor keeps exempt assets,  but the Chapter 7 Trustee assigned to the case seizes and liquidates the nonexempt assets for the benefit of the creditors.

Given that the reader has enough equity that he was considering a home equity line of credit (“HELOC”), it may be that he has too much equity to fully exempt.  If that is the case, then a Chapter 7 bankruptcy might be a poor choice since he and his wife would lose their home to the depredations of the Chapter 7 Trustee assigned to the case.  Again, more detailed information about his assets and encumbrances against them are needed to say for sure.

However, two other chapters of the Bankruptcy Code may be worth considering because debtors filing bankruptcies under those chapters can keep their assets regardless of their value or exempt status.
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