The Fourth Circuit Court of Appeals recently issued a decision on removing a mortgage lien in what is normally referred to as a Chapter 20. This is a Chapter 13 Bankruptcy that has been filed within four years of when an individual has received a discharge in a Chapter 7 Bankruptcy. Until this decision, it was unclear in Virginia whether a debtor could remove a second mortgage in a case where they are not eligible for a discharge. This case makes it clear that the fact that the debtor is not eligible for a discharge does not prevent the Bankruptcy Court from removing a mortgage lien that is wholly unsecured.
There are several factors that must be present for an individual to be able to remove a second mortgage or other lien from the property in a Chapter 20. First the property must be worth less than what is owed on the first mortgage. This will require an appraisal of the property. Second, there must be some other reason for filing the Chapter 13 such as mortgage arrears on the first mortgage or new debt since the discharge in the Chapter 7. However, a court might take issue with a debtor who runs up credit card debt or similar debt immediately after filing a Chapter 7 bankruptcy and then seeks relief from the debt in a Chapter 13. Since the debtor will not be eligible for a discharge in the second case, any new debts will probably need to be paid in full through the case. Third, the debtor must be able to make regular monthly payments in the Chapter 13. This will probably require some type of change in expenses or income after the Chapter 7.
This case would also make it easier for a debtor to remove judgment liens from the property if those liens are for debts that occurred after the Chapter 7 bankruptcy. However, if these debts were incurred after the Chapter 7, they may have to be paid in full.
If you believe that you may be able to remove a second mortgage or home equity line of credit from your home but believed you were not able to do this because of a recent Chapter 7 bankruptcy, give us a call at 757-276-6555. We will be happy to meet with you to analyze your situation.