Debtors are discovering that they can strip off their second mortgage lien on their primary residence by filing a Chapter 13 bankruptcy where the value of the house is equal or less than the balance of their first mortgage In such cases, there is no equity securing any part of the second mortgage. Debtors with upside down second mortgages often also have substantial unsecured credit card debt. They could not afford even a first mortgage unless they get relief from their credit card payments.
Some of my own clients have asked me whether they can combine a Chapter 7 bankruptcy and a Chapter 13 bankruptcy to both discharge unsecured debts and then strip their second mortgage from their primary home. The plan is to file a Chapter 7 and discharge all credit card debt. After the Chapter 7 discharge is entered, the debtor would immediately file for Chapter 13 bankruptcy. There would be not automatic stay applied in the Chapter 13 case, but the debtor would be current on his mortgage payments would not benefit from an automatic stay’s protection from foreclosure. The debtor would file a motion to strip the second mortgage in the Chapter 13 case. The debtor would end up with no unsecured debts (all discharged in the Chapter 7) and no second mortgage on his residence (stripped in Chapter 13). Can this plan work?
I don’t think this plan will work, and here’s why. The judges in the Orlando Division have written a standard order granting a motion to strip a second mortgage in Chapter 13 case. The standard order states that the debtor’s second mortgage will be released from the property when the debtor completes the Chapter 13 plan and the court enters a Chapter 13 discharge of any debts not paid in the plan. However, under the new bankruptcy law a debtor is ineligible for a discharge under Chapter 13 if he received a prior discharge in a Chapter 7 case file four years before the current Chapter 13. Therefore, the Chapter 13 filed immediately after the Chapter 7 could not earn a discharge. Since the standard mortgage strip order requires a Chapter 13 discharge, the Chapter 13 filed soon after the Chapter 7 case could not strip the debtor’s second mortgage.
Sure, the debtor could wait four years after the Chapter 7 case to try the Chapter 13 mortgage strip, but by then the debtor either will have defaulted on the unaffordable second mortgage or a market recovery will have increased the property value to the point where a mortgage strip is not allowed.