Ninth Circuit BAP Squarely Upholds ‘Chapter 20’: No Lien and No Claim Survive

At least when the debtor is eligible for a discharge in chapter 13, the Ninth Circuit Bankruptcy Appellate Panel squarely holds that a debtor may employ so-called chapter 20 to strip off an underwater subordinate mortgage while simultaneously avoiding personal liability for the debt. The typical chapter 20 case works like this: The consumer first files under chapter 7 to extinguish personal liability on an underwater home mortgage. Later, sometimes the day after receiving a chapter 7 discharge, the consumer files a separate chapter 13 case to strip off the mortgage lien that survived chapter 7 as an in rem liability solely against the real property. Although the debtor may not be eligible for a discharge in chapter 13, the debtor can strip off the subordinate lien by full payment under the plan of whatever unsecured debts she or he has. Two Supreme Court decisions potentially bear on the issue. The Supreme Court held in 1992 in Dewsnup that a mortgage cannot be stripped off in chapter 7. Dewsnup v. Timm, 502 U.S. 410 (1992). In Bank of America N.A. v. Caulkett, 135 S. Ct. 1995 (2015), the high court held that a debtor may not strip down a mortgage in chapter 7. So far, the Supreme Court has erected no explicit roadblock to prevent chapter 20 from stripping off an underwater mortgage.

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