In a recent bankruptcy case involving a debtor who filed Chapter 13 bankruptcy within four years after receiving a Chapter 7 bankruptcy discharge, the bankruptcy court ruled that he had a right to strip the wholly unsecured junior mortgage lien. Typically, a debtor who files Chapter 13 bankruptcy within four years of receiving a Chapter 7 bankruptcy discharge is not allowed a discharge in their Chapter 13 case. However, the bankruptcy court ruled that the no discharge rule only applied to secured debt.
What Does It Mean For Debtors?
A debtor in a no discharge Chapter 13 bankruptcy case may be able to cram down their second mortgage if it is wholly unsecured. For example, if they have a house worth $100,000 with a $100,000 first mortgage and a $25,000 second mortgage, that second mortgage could be made unsecured in Chapter 13 bankruptcy. Even if the debtor recently received a Chapter 7 bankruptcy discharge, that unsecured mortgage might be dischargeable in Chapter 13 bankruptcy.
This will only apply to a debtor who did not reaffirm their mortgage debt in their Chapter 7 bankruptcy. If the mortgage debt was reaffirmed the debtor is responsible for paying it after their bankruptcy discharge. While they may be able to repay the reaffirmed debt in a Chapter 13 bankruptcy, they won’t be able to discharge the reaffirmed debt.
Debtors need to seriously think about how reaffirming their mortgage debt will impact any future bankruptcy case they need to file. Speak with your bankruptcy attorney about whether or not it is prudent to reaffirm mortgage debt especially unsecured second mortgages.