A Chapter 20 Bankruptcy case is when you file a Chapter 7 Bankruptcy, complete that case through discharge and then file a Chapter 13 Bankruptcy. The term Chapter 20 comes from adding the numbers 7 and 13 together. 

A Chapter 20 case is often beneficial in circumstances where debtors have filed a Chapter 7, completed that case, but still have issues to deal with such as priority taxes or mortgage arrears. They can also be beneficial for debtors who have those remaining issues, but may also have a second (or even third) mortgage for a home that is underwater. The later is the circumstance where the issues of whether a Chapter 20 is possible truly arises.

I will not be going into a detailed analysis of the law or the case law on the issues in Chapter 20 cases, instead I will try to summarize the gist of how a Chapter 20 could be beneficial to some debtors. 

The case of In re Frazier v. Real Time Resolutions, Inc., 469 B.R. 889 (E.D. Cal. 2012) most recently addressed the issue of Chapter 20 cases in the Eastern District of California and stated that so long as certain elements are met, debtors can file a Chapter 20 and strip the second mortgage. The case was initially heard in the Sacramento Bankruptcy Court before the Honorable Judge Sargis, and was affirmed by the Honorable Judge England of the United States District Court of the Eastern District of California (which means he agreed with the Bankruptcy Court decision). 

If a second mortgage can be ‘stripped’ that usually means that it is unsecured because the house is worth less than what is owed to the first mortgage which is secured against the home. Generally in a Chapter 13 case the second mortgage would then be treated as an unsecured debt (like a credit card) and the debtor(s) would receive a discharge of that debt, and the lien would no longer be against the home.

The first issue in the case of filing a Chapter 13 after a ‘successful’ Chapter 7 is that the debtor(s) will not receive a discharge in the Chapter 13 case. So then the issue is whether a debtor can get rid of a second mortgage lien if they are not going to receive a discharge in the Chapter 13. The short answer is that the court determined that yes they can strip the second mortgage in a Chapter 13 even if they do not receive a discharge because of the prior Chapter 7 case.

The Court in the case of In re Frazier found that the laws made by “Congress did not intend to prevent lien stripping…and no discharge is required to effectuate a strip of a junior lien of a debtor’s primary residence.” 

In other words, the law at issue prevented a discharge, but it did not prevent the debtor(s) from stripping the second mortgage. Arguably, the debt owed to the second mortgage was already discharged in the Chapter 7, but the lien still remained.

So what will happen in the case of a Chapter 20 is that the debtor(s) will receive a final decree closing their Chapter 13 case, but they will receive a notice stating that they will not be receiving a discharge. 

Considering they already received a discharge in the Chapter 7 case, and assuming there are no additional debts they hoped to discharge, this will still result in obtaining what the debtor(s) are seeking, which is to strip their second mortgage while also addressing the remaining debt issues such as taxes or arrears.

Keep in mind, the debtor(s) have to meet all of the other elements of a Chapter 13 case such as proposing a plan that complies with all laws and involves a reorganization. Additionally, the debtor(s) have to complete the plan just as in a typical Chapter 13 case.

With that said, it seems clear that the debtor(s) need to be attempting to accomplish other goals with their Chapter 13 plan such as maybe getting current on their first mortgage and/or paying priority tax debts. They need to be doing some sort of reorganization and not ‘just’ trying to strip the lien of the second mortgage. 

Chapter 20's can be great for debtor(s) who may still have some remaining issues such as priority tax debt or are behind on their mortgage and have a second mortgage that is eligible to be stripped. Bankruptcy is a privilege that is provided to help people get a fresh start. By discussing your case with a Bankruptcy attorney, you may find you have many options, even if you already filed a prior Bankruptcy.