Explaining Chapter 20 Bankruptcy in California

Posted by on Nov 18, 2011 in Chapter 13 Bankruptcy Issues, Chapter 7 Bankruptcy Issues, Discharge in Bankruptcy | 61 comments

Chapter 20 Bankruptcy in California is the concept of a debtor filing a chapter 7 case and then subsequently filing a chapter 13 case.  Afterall 7 + 13 = 20.   So why does this matter?   Well, when one files a chapter 7 case, one receives a chapter 7 discharge.  Generally speaking, if one files a subsequent chapter 13 case, one cannot receive a discharge, at least not for a chapter 13 case that was filed within 4 years of the chapter 7 case.

So why would a person file chapter 7 bankruptcy and then consider chapter 13?  Because, chapter 13 bankruptcy allows one to strip a lien on their residence or investment property.   There has been an ongoing debate between courts, practitioners, and experts in the field about whether a chapter 13 discharge is necessary for a lien strip, particularly in these chapter 20 cases.

In the Southern District of California, or more specifically the San Diego, CA bankruptcy courts, judges there have held that lien stripping in a chapter 20 case is allowable under the proper set of facts, without the necessity of the debtor receiving a discharge.   This is huge.   The San Diego bankruptcy case of In re Hill, 440 BR 176 (2010) determined that the underlying claim with respect to the Debtor’s second mortgage on their home had already been discharged in the chapter 7 case – although the second mortgage lender’s security interest, otherwise called a lien, still existed at the time of filing the chapter 13 case.

The court in Hill determined that Section 506(d) of the bankruptcy code did not control chapter 13 lien strips.  The Hill court believed the Supreme Court case of Dewsnup v. Timm, 502 US 410 (1992) controlled.  Dewsnup held that chapter 7 lien stripping under Section 506(d) is not allowable.  The Hill court further looked at the language of Sections 506(a) and 506(d) and noted tha tthe terminology of “allowed secured claim” was used in both statutes but were applied differently.   Furthermore, the court noted that under statutory construction rules, a bankruptcy statute “must apply in all bankruptcy cases if it is to apply in any.”  See Hill page 181.

Thus, Hill opined that 506(a) rather than 506(d) was the basis for lien stripping and that Section 1322 provided a “superior source of authorization for lien strips” for those in chapter 13 cases.  Furthermore, the court found that Section 1325(a)(5), which says a holder of a secured lien retains its lien unless paid in full or upon debtor’s discharge,  was inapplicable in chapter 20 cases.  Hill found that the second mortgage that could be stripped was unsecured in a chapter 13 cases under Section 1322 per In re Zimmer, 313 F.3d 1220.

This is in stark contrast to the analysis in a published American Bankruptcy Law Journal article, 85 Am. Bankr. L.J. 161  titled “Post-BAPCPA Availability of Lien-Stripping to a Chapter 20 Debtor,” written by bankruptcy judicial law clerk and attorney Peenesh Shah in 2011.  In short, the article says that a chapter 13 discharge is necessary for a lien strip per the definition of “allowed secured claim” under 506(d) as applied in Dewsup, so therefore Bankrutpcy Code 1325 controls rather than Section 1322 per the Hill case.  The article also notes that the 7th Circuit found a discharge is necessary for lien strip.  See page 164 and In Re Jarvis, 390 BR 600 (Bankr. C.D. Ill. 2008).   The article disagrees with the findings of Hill in that Shah believes that Section 1325(a)(5) “should be read to apply to wholly unsecured creditors.”  See Page 168.  In short, the article demonstrates that the term “allowed secured claim” was clearly defined by the Supreme Court in the Dewsnup case for the purpose of 506(d) and that the definition should apply to all references in the bankruptcy code where “allowed secured claim” is found.

While the Hill case and Shah’s article provide significantly more depth in analysis that what I’ve discussed, what is clear is that courts and circuits are divided on this issue.   However, a handful of California bankruptcy courts have shown a disposition towards allowing legitimate chapter 20 bankruptcy cases in California.  A chapter 20 bankruptcy in California must be filed in good faith – meaning the debtor must not be abusing or manipulating the bankruptcy process.  For example, filing a chapter 20 bankruptcy in California simply because a debtor doesn’t want to repay unsecured creditors what the creditors would be entitled to under a chapter 13 bankruptcy case is completely inappropriate.  No court will allow a debtor to take advantage of the bankruptcy process in that manner.

61 Responses to “Explaining Chapter 20 Bankruptcy in California”


    2nd Mortgage holder: “You discharged me in the Ch. 7, so on what basis are you dealing
    with me again in this Ch 13?”
    Homeowner: “As a creditor who still has contractual rights in my home pursuant to the
    security agreement.”
    2nd Mortgage holder: “Then I am still a secured creditor.”
    Homeowner: “In a way. For the purpose of me being allowed to deal with you in the
    Ch 13 filed after the Ch 7 discharge”
    2nd Mortgage holder: “Well, if I’m secured you can’t modify my loan in this Ch 13, plus I
    keep my lien until I’m paid in full under non bankruptcy law or until you get a discharge,which you can’t get in a Chapter 20.”
    Homeowner: “When it comes to modifying your loan in a Chapter 13 contractual rights
    alone don’t make you secured if the collateral has no value above what is owed on the first
    2nd Mortgage holder: “So I’m secured so that you can deal with me again in this Ch 13
    filed after the Ch 7 discharge, but unsecured so that you can lien strip my second mortgage?”
    Homeowner: “Exactly.”
    2nd Mortgage holder: “Aren’t you talking out of both sides of your mouth? Isn’t this just
    legal double talk?”
    Homeowner: “Had my first case been a Chapter 13 I would still be allowed to lien strip
    your second mortgage on the basis that the collateral had no value despite your contractual rights
    by paying you pursuant to the requirements of a Ch 13 Plan, so nothing has changed.”


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