How a Chapter 20 bankruptcy can help save a home from foreclosure after a Chapter 7 discharge

You were drowning in debt. Your home had two mortgages that together were more than the house was worth. You were falling behind on both trying to stay ahead of your creditors. A Chapter 7 bankruptcy discharged the credit card and other unsecured debt making things easier.

But you are still behind on those mortgages and a foreclosure is underway or threatened.

A Chapter 20 might work. Chapter 20 (7+ 13) is a Chapter 13 bankruptcy after a Chapter 7 discharge. The purpose is not to get a second discharge but to be given 3 to 5 years to catch up on that mortgage and maybe save your home. Not all courts will let you do this, but the trend in New Jersey is to allow a Chapter 20 if it serves a legitimate rehabilitative purpose. The process can be tricky though.

First, you need to have disposable income (ie money left over after paying basic living expenses). Usually, this is because after your Chapter 7 filing, you got a job or your income increased substantially.

Second, you cannot have more than $383,175 in non-contingent liquidated unsecured debt. This can include the amount of any shortfall between a mortgage balance and the value of the real estate net of prior mortgages.

But here is what is possible. First, if you are behind on mortgage payments and no Sheriff Sale has taken place, you can take up to 5 years to bring the loan current, providing you start paying again on time once the new bankruptcy is filed, and do not miss payments.

Under certain circumstances, you can “strip off” [ie remove] a second or third mortgage if the value of the home is less than the first mortgage or second mortgage that is ahead of the one you want to get rid off. If this is successful, the stripped-off mortgage is removed from the home.

An open question is whether in a Chapter 20 the stripped off mortgage results in a new payment obligation which has to be dealt with in the plan. After all, the personal payment obligation was discharged in the Chapter 7. But a New Jersey court has held that in a Chapter 20 strip-off, the mortgage debt is converted to a new payment obligation. (This was the subject of a previous article, If the stripped off mortgage balance is too large, at least one court in New Jersey has held that it can result in disqualification for Chapter 13 relief.

It is always better if possible to file a Chapter 13 first rather than a Chapter 20. But if there were good reasons that was not possible, a Chapter 20 can be a viable option for many people to save their home.

At Neuner and Ventura LLP, we have the experience needed to help people in financial trouble take back control of their life. If we can help, please feel free to call us at (856) 596-2828.

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