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The Bankruptcy Code prohibits a court from discharging debt if a debtor files a Chapter 7 or 13 case too soon after a prior case that resulted in a discharge. Despite this restriction, a few debtors around the country have used a process informally known as a “Chapter 20” bankruptcy. This involves filing a Chapter 13 petition shortly after obtaining a discharge in a Chapter 7. The “20” refers to the sum of 7 and 13. The purpose of such a case is to take advantage of provisions in Chapter 13 that allow removal of certain liens from real property. A Chapter 20 bankruptcy remains highly controversial, and courts disagree about whether it is permissible or not. A debtor considering such a plan should consult with a knowledgeable bankruptcy attorney.

Chapter 20 Bankruptcy

A debtor cannot obtain a discharge of debt in a Chapter 13 case filed within four years after the filing date of a Chapter 7 case that resulted in discharge. 11 U.S.C. § 1328(f)(1). A Chapter 20 bankruptcy involves filing a Chapter 13 petition shortly after concluding a Chapter 7, despite the impossibility of obtaining a discharge, in order to “strip” liens that remain attached to the debtor’s residence.

Chapter 13, according to the interpretation of some courts, allows the removal of certain subordinate liens from the title to real property, treating those liens as unsecured claims. 11 U.S.C. § 1322(b)(2). It generally applies to subordinate liens when the value of the secured property is less than the amount owed to the primary lienholder. A California bankruptcy court defined this controversial process, known as “lien stripping,” as “valuing a lien at zero and removing it from title.” In re Hill, 440 B.R. 176, 178 n. 1 (Bankr. S.D. Cal. 2010), citing Dewsnup v. Timm, 502 U.S. 410, 417 (1992).

The controversy surrounding Chapter 20 involves the requirement that a debtor file a Chapter 13 petition in good faith. Courts disagree over whether a case brought with the knowledge that discharge is impossible and the intent to remove a lien through a controversial procedure can be construed as “good faith.”

Chapter 20 in California – In re Hill

The Bankruptcy Court for the Southern District of California held that the debtors did not act in bad faith by seeking to strip a lien in a Chapter 20 case. Hill, 440 B.R. at 184. The debtors had other reasons to seek bankruptcy protection besides the lien strip, the court found, but it also held that a lien strip may be permissible even if the debtor does not qualify for a discharge under Chapter 13. Id. at 181.

Criticism of Chapter 20

Courts have adopted a variety of approaches to the Chapter 20 procedure, including those that view it as a “de facto discharge” and do not allow it at all. In re Jennings, 454 B.R. 252, 256 (Bankr. N.D. Ga. 2011). Other courts allow lien stripping, but then reinstate all other parties’ “pre-bankruptcy rights” after concluding the case. Id. at 256-57.

People who find themselves in financial distress may be able to obtain relief through the bankruptcy system, which can provide them with a way to restructure and pay down their bills, or even to obtain a discharge of their debts. Bankruptcy attorney Devin Sawdayi has practiced in the Los Angeles area since 1997, guiding countless clients through the process of personal bankruptcy with respect and dignity. To schedule a free and confidential consultation regarding your case, contact us today online or at (310) 475-9399.

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