What is Chapter 20?

Let’s say you have a house with a first and second mortgage on it. You end up in financial trouble, so you file a Chapter 7 case. Most of your debts are discharged, including your personal liability on the mortgages.

However, you continue to make payments on the mortgages because they’re secured debts. If you don’t make the payments, the mortgage holders can foreclose.

It’s hard to imagine it today, but let’s say property values decline. The value of the house drops below the amount owed on the first mortgage. So you file a chapter 13, and “strip” the second lien.

But what happens to debt on the second mortgage? 

If not for the prior Chapter 7, you would have to pay some some of the second mortgage through the plan as an unsecured debt. But here, recall that the Chapter 7 discharged personal liability.

This is the so-called “chapter 20” situation because of the combined effects of the Chapter 7 and 13 on the second mortgage. (There is not actually a chapter 20 in the Bankruptcy Code.)

In the Ninth Circuit, after a 2019’s BAP decision in Washington v. Real Time Resolutions, Inc., the second mortgage does not need to be paid in the Chapter 13 plan, which could save debtors a lot of money. 

Attorneys should keep it in mind… if property values ever decline again. I remember doing a lot of Chapter 13 lien strips back in the Great Recession. A chapter 20 could have been a useful tool back then for some clients.

For a more detailed write up, please read Gregory Salvato’s well written analysis for the Insolvency Committee at the California Lawyers Association.