Chapter 20 is the colloquial term for the practice of filing for Chapter 13 bankruptcy on the heels of a Chapter 7 discharge. In re Whiting, the Middle District of Florida Bankruptcy Court held that a junior lienholder’s unsecured claim, which had been discharged in a prior Chapter 7 case, was unenforceable in a subsequent Chapter 13 case. In Whiting, a creditor had a second mortgage on the Debtor’s homestead real property. During the Chapter 7 case, the Debtors received a discharge as to liability on the note secured by the second mortgage. When the Debtors subsequently filed the Chapter 13 plan, the Court held that the second mortgage was valued at zero and would be stripped upon the completion of the plan. The Trustee objected.
In affirming the judgment, the Court found that the creditor’s claim was unenforceable because the unsecured debt was discharged in the previously filed Chapter 7 case. Because the creditor’s claim was rendered unenforceable, and thus, valueless, the creditor could not receive a distribution form the Debtor’s estate.
Creditors should be cognizant of how the Bankruptcy Code treats unsecured liens in Chapter 20 situations. Second mortgage holders should evaluate the potential risk associated with the foregoing scenario before moving forward in a case.
