Monday, July 23, 2012

Florida Bankruptcy Court OKs 'Chapter 20' Junior Lien Strip-Off From Debtor's Home; Ch. 13 Case Filed Less Than 2 Months After Scoring Ch. 7 Discharge

From the Florida Bankruptcy Law Blog:

  • [A Florida bankruptcy] judge held that a Chapter 13 debtor may strip a wholly unsecured junior lien from his homestead even though the debtor filed a prior Chapter 7 case and is therefore ineligible for the Chapter 13 discharge.

    However, the court also said that the Chapter 13 must have been filed in good faith, and a debtor is not proceeding in good faith if he files a Chapter 13 primarily to strip the second mortgage. The issue is whether the Chapter 13 is designed mainly to achieve a lien strip that could not be obtained in the prior Chapter 7. In this particular case, the court did not find the debtor acted in bad faith.

    The debtor had initially filed a Chapter 13 case until the Chapter 13 moved to dismiss the case because the debtor’s unsecured debts exceeded Chapter 13 ceilings. The debtor then retreated into a Chapter 7 to discharge the unsecured debt.

    Subsequently, the debtor filed a Chapter 13 to strip the second mortgage.(1) The court noted that the debtor did not start off with plan to file Chapter 7 and a subsequent Chapter 13.
For the ruling, see In re: Dang, 467 B.R. 227 (Bankr. M.D. Fla. March 12, 2012).

In a 'somewhat' related post, see Another Fully Underwater 2nd Mortgage Holder Gets Wiped Out As Federal Appeals Court OKs Lien Stripping Of Subordinate Loan In Ch. 7 Bankruptcy, which addresses a recent ruling by the U.S. Court of Appeals for the 11th Circuit (the court that has appellate jurisdiction over cases coming from the lower Federal courts in Florida - as well as from Georgia and Alabama) that stamped its approval on a junior mortgage lien strip-off in a Chapter 7 bankruptcy case.

(1) The approach of filing a bankruptcy petition under Chapter 13 shortly after obtaining a debt discharge under Chapter 7 is sometimes informally referred to as a "Chapter 20 bankruptcy." In this case, the Chapter 13 petition was filed about seven weeks after obtaining the debt discharge under the earlier-filed Chapter 7 case. According to the court ruling, the following timeline sets forth when the petitions were filed:
  • On November 9, 2010, the Trustee filed a Motion to Dismiss the first case, and alleged that the Debtor was not eligible to be a debtor under Chapter 13 because her debts exceeded the limits provided by § 109 of the Bankruptcy Code. On November 15, 2010, the Debtor converted the first Chapter 13 case to a case under Chapter 7 of the Bankruptcy Code. She received a discharge in the Chapter 7 case on March 8, 2011. On April 25, 2011, the Debtor filed the petition that commenced the current Chapter 13 case.

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