Tag Archives: bankrutpcy

Fourth Circuit Allows Lien Stripping in Chapter 20 Bankrutpcy

On May 10, 2013 the U.S. Court of Appeals for the Fourth Circuit ruled that a debtor can strip off (eliminate) second mortgages and other junior liens in a Chapter 20 bankruptcy under certain circumstances. (In re Davis, No. 12-1184 (May 10, 2013).)

This means that if you file a Chapter 13 bankruptcy soon after a Chapter 7 bankruptcy, you may be able to get rid of second mortgages, liens, and HELOCs in the bankruptcy (if you live in the Fourth Circuit — Maryland, North Carolina, South Carolina, Virginia, and West Virginia).

Here’s how this works.

What Is Lien Stripping?

In Chapter 13 bankruptcy, if you have a second mortgage, junior lien, or any mortgage or lien other than your first mortgage that is “wholly unsecured,” you can get rid of it. The amount of the mortgage or lien becomes part of your unsecured debt — which most people pay off through their Chapter 13 plan at a rate of pennies on the dollar.

“Wholly unsecured” means that your equity in your home, after subtracting the balance on your first mortgage, won’t cover any of the balance on the junior mortgage. Here’s an example: Your home is worth $400,000 and the unpaid balance on your first mortgage is $450,000. You have a second mortgage for $50,000. Because your home equity is not enough to cover your first mortgage, your second mortgage is wholly unsecured, and eligible for lien stripping.

Lien stripping is allowed in Chapter 13 bankruptcy, but not in Chapter 7 (although you might be able to strip liens in Chapter 7 in the Eleventh Circuit.)

(Learn more about lien stripping in Chapter 13 bankruptcy.)

What Is a Chapter 20 Bankruptcy?

Chapter 20 bankruptcy is an informal way of referring to the practice of filing for Chapter 7 bankruptcy, and then following with a Chapter 13 bankruptcy.  Some debtors do this because the Chapter 7 does not get rid of all their debts (for example, child support arrears, tax debts, and other priority debts). The Chapter 13 allows the debtor to pay off these debts in a three to five-year payment plan.

The debtor cannot get a discharge in Chapter 13 if it falls too close upon the heels of the Chapter 7 — but often that doesn’t matter.  (Learn the rules about multiple bankruptcy filings.) The debtor can still get the protection of the bankruptcy court during the plan payment period, and in this way can make more reasonable payments towards the remaining debts.

Lien Stripping in Chapter 20 Bankruptcy

What remains an unresolved question in many circuits is this:  Can a debtor strip off junior liens in a Chapter 13 bankruptcy even though there is no discharge available (because of the previous Chapter 7)?

The Court of Appeals in the Fourth Circuit, in In re Davis, No. 12-1184 (May 10, 2013) said yes. This is good news for bankruptcy debtors living in Maryland, North Carolina, South Carolina, Virginia, and West Virginia.

6th Circuit Says Michigan Debtors Can Use Bankruptcy-Only Exemptions

On August 20, 2012, the United States Court of Appeals for the Sixth Circuit ruled that people filing for bankruptcy in Michigan may use Michigan’s set of bankruptcy-only exemptions. The decision (in In re Schafer, 2012 WL 3553294 (6th Cir. August 20, 2012)) is good news for those filing for bankruptcy in Michigan.

The issue first hit the courts in 2011, when the Sixth Circuit Bankruptcy Appellate Panel held that Michigan’s bankruptcy-specific exemptions (found in Mich. Comp. Laws §600.5451) were unconstitutional.

Here’s what this all means.

What Are Bankruptcy Exemptions?

In Chapter 7 bankruptcy, exemptions allow you to keep certain types of property, often up to certain amounts of equity. For example, if the law provides you with a motor vehicle exemption up to $5,000, it means you can protect up to $5,000 in equity in your car. If your car is worth $3,000, the bankruptcy trustee cannot take it since all of the equity is covered by an exemption. Exemptions play a role in Chapter 13 bankruptcy too.  To learn more, see our Bankruptcy Exemptions area.

Bankruptcy-Only Exemptions

Federal bankruptcy law provides a set of exemptions. (You can find them in our Federal Bankruptcy Exemptions article.)  Each state has a set of exemptions as well.  Usually, those exemptions can be used in bankruptcy and to protect property from judgment creditors. But some states, like Michigan, have a set of state exemptions that apply only in bankruptcy. They cannot be used to protect property from judgment creditors. These are referred to as bankruptcy-only exemptions.

 The Constitutionality of Bankruptcy-Only Exemptions

In 2011, the Bankruptcy Appellate Panel in the 6th Circuit (which covers Kentucky, Michigan, Ohio, and Tennessee) held that Michigan’s bankruptcy-only exemptions were unconstitutional.  But four days ago, the 6th Circuit Court of Appeal reversed that decision – ruling that bankruptcy-only exemptions are constitutional. This means that once again, bankruptcy filers in Michigan can choose from three sets of exemptions:  the federal exemptions, Michigan’s regular exemptions (those that also apply to judgment creditors), and Michigan’s bankruptcy-only exemptions.

What Does This Mean for Michigan Bankruptcy Filers?

For bankruptcy filers, this is good news. It’s always better to have more options, and for many filers, the bankruptcy-only exemptions will protect more property.  For example, the homestead exemption in Michigan’s bankruptcy-only exemptions is significantly higher than the homestead exemption in Michigan’s general exemption scheme. So for filers that have a home, the bankruptcy-only exemptions may help those filers keep their home.

(Find more information on filing for bankruptcy in Michigan.)