Sometimes a bankruptcy client needs the liquidation benefits of a Chapter 7 and the reorganizing benefits of Chapter 13 bankruptcy. Which chapter do enterprising BK attorneys choose when facing this conundrum? Well, sometimes they choose both.
The U.S. Bankruptcy Court for the District of Nevada issued a recent decision clarifying when debtors may file successive Chapter 7 and Chapter 13 cases — the so-called “Chapter 20” strategy. In re Okosisi, 2:09-27113-BAM. Here’s what happened in Okosisi. There, the debtors obtained a Chapter 7 discharge in September of 2008 and then filed a Chapter 13 case in September of 2009. In their Chapter 7 case, the debtors addressed a substantial amount of unsecured debt related to a failed restaurant. In their Chapter 13 case, the debtors sought to eliminate an unsecured lien on the primary residence and pay off arrearages on their residence and priority tax claims over time. The Ch. 13 Trustee, however, opposed confirmation of the debtors’ plan to do this.
It’s important to note that the debtors were ineligible for a Chapter 13 discharge because of the timing of their filing. If a debtor has received a Chapter 7 discharge within four years of her Chapter 13 filing, she is ineligible for a Chapter 13 discharge.
In its thoughtful opinion confirming the debtors’ Chapter 13 plan, the Bankruptcy Court held that the fact the debtors were ineligible for a discharge did not preclude them from removing the junior lien on their primary residence. In a typical Chapter 13 case, the holder of a secured claim retains its lien until the debtor receives a discharge. But “secured claim” has a specific meaning in the bankruptcy context: Under Section 506(a) of the Bankruptcy Code, a creditor has a secured claim only to the extent of the value of the collateral and an unsecured claim for the part that exceeds the collateral’s value. The Court reasoned that since the value of the debtors’ primary residence was less than the amount of the debtors’ first mortgage, the junior lien was an unsecured claim that could be avoided without a discharge. Instead, the junior lien would be removed upon debtors’ completion of their Chapter 13 plan.
After concluding that the debtors could strip off their unsecured lien despite being ineligible for a discharge, the Court still needed to determine whether the debtors’ serial filings met the good faith requirement for confirming their Chapter 13 plan. The Court held the debtors had indeed proposed their plan in good faith based on the following:
-Debtors had a need for Ch. 13 BK beyond stripping off their junior lien; debtors also needed the reorganizational features of Ch. 13 to pay off arrearages on their primary residence and priority tax claims over time
-Debtors were not using serial filings to avoid payments to creditors; instead, debtors were devoting all of their disposable income to their Ch. 13 plan
So, the Court confirmed the debtors’ plan, allowing them to attempt to reorganize their mortgage and tax debts in a Chapter 13 case after they eliminated their unsecured debts in a Chapter 7 case.
Okay, time to sum up. Just because a debtor may not be eligible for a Chapter 13 discharge due to receiving a Chapter 7 discharge less than four years ago, the debtor may still be able to take advantage of Chapter 13’s reorganizational features. Chapter 20 may be a useful strategy for many people in the Las Vegas area, especially those with a completely unsecured second mortgage, tax claims, or an undersecured vehicle. In the appropriate case, Chapter 20 can give a debtor the freshest of fresh starts, and, in the words of Candide’s Dr. Pangloss, be the debtor’s best of all possible worlds.