Chapter 13 bankruptcy offers debtors the opportunity to strip off a wholly unsecured second mortgage on their primary residence. Most courts have held that debtor’s mortgage is stripped from his house when he completes the Chapter 13 plan and gets his Chapter 13 discharge.
The discharge requirement effectively prohibits someone from filing a Chapter 7 plan to discharge unsecured debt followed soon after by a Chapter 13 filing to strip a second mortgage. The reason is that a Chapter 13 debtor is not eligible for a discharge if he filed a successful Chapter 7 case within the four prior years. Therefore, a debtor who discharged unsecured debt in a Chapter 7 must wait four years to file a Chapter 13 bankruptcy to strip a second mortgage- according to most courts.
Recently, a Florida bankruptcy judge came to a different conclusion about Chapter 13 lien stripping. The judge held that a Chapter 13 debtor may strip a wholly unsecured junior lien from his homestead even though the debtor filed a prior Chapter 7 case and is therefore ineligible for the Chapter 13 discharge. However, the court also said that the Chapter 13 must have been filed in good faith, and a debtor is not proceeding in good faith if he files a Chapter 13 primarily to strip the second mortgage. The issue is whether the Chapter 13 is designed mainly to achieve a lien strip that could not be obtained in the prior Chapter 7. In this particular case, the court did not find the debtor acted in bad faith.
The debtor had initially filed a Chapter 13 case until the Chapter 13 moved to dismiss the case because the debtor’s unsecured debts exceeded Chapter 13 ceilings. The debtor then retreated into a Chapter 7 to discharge the unsecured debt. Subsequently, the debtor filed a Chapter 13 to strip the second mortgage. The court noted that the debtor did not start off with plan to file Chapter 7 and a subsequent Chapter 13. The case is In re: Dang Case No. 3:11-2970