In a Chapter 13 bankruptcy, a debtor can strip off a wholly unsecured second mortgage on his primary residence.  The debtor’s mortgage is stripped when he or she completes the Chapter 13 plan and gets the Chapter 13 discharge. 

Historically, a debtor is prohibited from first filing a Chapter 7 to discharge unsecured debt followed soon thereafter by a Chapter 13 bankruptcy 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 has discharged unsecured debt in a Chapter 7 must wait four years to file a Chapter 13 bankruptcy to strip a second mortgage.

Recently, in In re: Dang, Case Number 11-2970, a Middle District of Florida judge came to a different conclusion. The Court held that a Chapter 13 debtor may strip a wholly unsecured junior lien even though the debtor filed a prior Chapter7 case and is, therefore, ineligible for the Chapter 13 discharge. As a caveat, the Court also held 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.  The Chapter 13 trustee moved to dismiss the case because the debtor’s unsecured debts exceeded Chapter 13 ceilings. The debtor then converted to 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. 

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.