Bankruptcy lawyers frequently tout the potential benefits of filing “chapter 20” New York bankruptcy. There isn’t a chapter 20 in the Bankruptcy Code. It’s in quotation marks because it’s a chapter 13 bankruptcy filed after a chapter 7; seven plus thirteen equals twenty. A junior mortgage that’s completely underwater can be discharged in chapter 7, but the lien is still in place, meaning debtors must continue paying on the loan or else the lender will initiate a foreclosure on the house. That’s why debtors then file a chapter 13 bankruptcy: After completing the repayment plan, the lien is stripped and debtors can stop paying on that mortgage without any adverse consequences.
For debtors severely underwater, chapter 20 can be a great idea and a solid reason for sticking through a repayment plan to the very end. However, there are some good reasons to be cautious about filing “chapter 20.”
(1) There’s (usually) only one discharge. The chapter 7 bankruptcy results in a discharge but the debtor can’t get one after completing the chapter 13 plan. The reason is that the Bankruptcy Code only allows another discharge eight years after filing a chapter 7 case. Obviously, a debtor could file chapter 13 eight years later—hence the “usually”—but the house is almost certainly not worth that much time.
(2) More importantly, a hardship discharge won’t be available if the repayment plan can’t be completed—because of an illness or job loss, for instance—so if the debtor has difficulties repaying the plan, the case will have to be dismissed without the goal of stripping the lien being achieved.
(3) For many debtors, it just isn’t worth it. “Chapter 20” is a clever idea, but it only saves the debtor money if he or she owes a lot on junior mortgages. There’s a point when it’s probably a better idea to short-sell the house and just discharge the deficiency in chapter 7. Alternatively, debtors might find that as the economy improves, their equity position grows as well, obviating the need for bankruptcy. Debtors with high incomes or low mortgage balances might find that five years of a chapter 13 repayment plan is quite tedious.
“Chapter 20” bankruptcies can work for homeowners, but the circumstances need to be right. Too much debt and it’s better to sell the house. Too little debt and there won’t be a lien to strip after bankruptcy. Strategizing for resolving underwater junior mortgage is why it’s crucial to hire an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankrutpcy law firm Bruce Weiner for a free initial consultation.