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Lien Stripping in Chapter 13 without discharge


Posted on Dec 03, 2011

First, what is a chapter 20? One files first a chapter 7 to discharge all unsecured debt. After receiving a discharge which takes around 4 months, one can file a chapter 13 if it benefits the debtor. One benefit has been pointed out by the U.S. Bankruptcy Appellate Panel (PAP) of the Eight Circuit, on August 29, 2011. The panel pointed out that a debtor can file a chapter 13 after a chapter 7 to strip a wholly unsecured junior lien (meaning a second or third mortgage, the first mortgage would be older and higher in rank and would be senior) from his residence. The word "residence" is important, it cannot be a rental property, in order to strip off (meaning wiping out or eliminating) the second lien, the debtor must live in the property. The fact that the debtor does not receive a discharge in the chapter 13 (because one would have wait 4 years from after filing the chapter 7 in order to receive another discharge in a chapter 13) does not bar the effective lien avoidance. What happens if the case gets dismissed? Then, the lien would not be avoided even though the adversary proceeding was approved by the court, the plan must complete in order to avoid the lien. What does it mean if the lien is avoided? Who pays for the mortgage (lien) that is stripped off? Nobody, the mortgage company has the loss. The holder of the avoided lien is an unsecured creditor.

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