If a debtor is filing for bankruptcy under chapter 20 in Fourth Circuit, he/she can be eliminated to pay second mortgages and other junior liens under certain circumstances.
As per the above statement, if you are a resident of Fourth Circuit – Maryland, Virginia, North/South Carolina, and you have filed for chapter 13 bankruptcy immediately after filing for Chapter 7 bankruptcy, your second mortgage, junior liens, and HELOCs can be waived off.
Confused? Let us get into the detail..!!
What do you mean by Lien Stripping?
Under Chapter 13 of bankruptcy, you can eliminate/waive off any second mortgage, junior lien or any other lien/mortgage that is “wholly unsecured” other than your first mortgage. This amount ( the unsecured debt) can be paid off slowly at the rate of pennies as per the Chapter 13 repayment plan.
Let us explain the term wholly unsecured with an example. The value of your home is $400,000. Your first mortgage unpaid value is $450,000 and the second Mortgage is worth $50,000. Now, since the equity value of your home is not enough to cover/pay back your first mortgage, your second mortgage value becomes wholly unsecured and therefore eligible for lien stripping (to be eliminated).
Therefore, the term “wholly unsecured” is the amount that is calculated after deducting the equity value of your home from the unpaid balance on your first mortgage. The leftover amount is calculated as the wholly unsecured value which is subject to be eliminated/waived. Lien stripping is allowed only in Chapter 13 and not Chapter 7. Exception under Chapter 7 available only for residents of Eleventh Circuit
What do you mean by Chapter 20 Bankruptcy?
Chapter 20 is nothing but the process of filing for Chapter 13 bankruptcy immediately after filing for Chapter 7 bankruptcy. This process of filing for bankruptcy under 2 chapters simultaneously is formally known as Chapter 20. This is commonly done because under Chapter 7, all debts are not eliminated like – Child support, Tax, Alimony and few Priority debts. Hence, once debts are waived off under Chapter 7, the remaining amount can be paid in off under Chapter 13 in a 3-5 years payment plan, making the pay back process simpler for the debtor.
Care must be taken that the filing for both the chapters must be done at a reasonable gap, since if both are filed very close to each other, then it may happen that the debtor will not get the discharge under chapter 13. Though, it is possible to get the protection for the payment plan period which ca further help the debtor to pay off his debts smoothly.
Lien Stripping in Chapter 20 Bankruptcy
Based on the judgment of the Court of Appeals in the Fourth Circuit, irrespective of the availability of discharge, a debtor can now strip off junior liens in Chapter 13 Bankruptcy.