Stripping a Junior Mortgage in Chapter 7 Bankruptcy

Should I convert my Chapter 13 case to a Chapter 7 case?

Earlier in the year, the 11^th Circuit Court, in the case of In re: McNeal, held that Bankruptcy Debtors could now strip their junior mortgages and equity lines of credit from their primary residences in a Chapter 7 case. This decision was in contrary to a well settled principle of bankruptcy law, that if you were interested in stripping a junior lien off your home, you had to file a Chapter 13 bankruptcy case. But as surprised as most of the bankruptcy bar was with the decision in McNeal, what was not surprising was the rush of Chapter 13 cases that converted to Chapter 7. After all, why make payments to the Chapter 13 Trustee for three to five years when all that needed to be done was to convert the case to Chapter 7 and be done with the case all together in a matter of months.

For those debtors who qualified for Chapter 7 but chose to file Chapter 13, the decision to convert their case down to a Chapter 7 is a seemingly “no brainer.” This decision, however, is anything but a “no brainer,” and unfortunately, many attorneys are not asking the right questions of their clients when mulling over the decision. 

The lack of due diligence as to whether a person should convert to Chapter 7 may be due to all the new bankruptcy attorneys in town who may not have the experience necessary to see the dangers, or it may be because Debtors looking to convert their cases are so excited that they fail to mention otherwise important information. Common problem areas when converting a case include Debtors’: 

1. Current Income and Expenses. If the Debtors have begun earning more money since their Chapter 13 was filed or confirmed, they may not qualify for a Chapter 7 and instead would be required to return to Chapter 13 where they would likely then have to pay a higher percentage of their debt back.
2. Prior Bankruptcy History. Have the Debtors filed for Chapter 7 bankruptcy before, and was that anytime with eight years of filing the Chapter 13 case?
3. Appreciating Assets. If they had any non-exempt assets at the time the case was filed, do they still own them? This is a tricky area, and many attorneys who do not practice bankruptcy regularly will make the mistake of negotiating with a Chapter 7 Trustee regarding the current value of a particular asset, when the appropriate time to value the asset was when the case was filed originally as a Chapter 13. This is particularly expensive when the Debtor created equity in a vehicle during the pendency of the Chapter 13.
4.  Payment of Debt in Chapter 13. When negotiating with a Chapter 7 Trustee, the Debtors or their attorneys need to consider how much unsecured debt was repaid in the Chapter 13 case when negotiating the purchase of assets from the Chapter 7 Trustee. Failure to properly account for the debt paid in the Chapter 13 could result in Debtors paying for an asset twice!

Whether a consumer should file a Chapter 7 or Chapter 13 bankruptcy is a comprehensive question that involves an in-depth analysis. In short, if you are currently a client who is in a Chapter 13 primarily to strip a second mortgage off of your home, please feel free to call our office to inquire as to whether it may be in your best interest to consider converting to a Chapter 7 to both strip off your second mortgage and get out of bankruptcy quicker.

We Can Help

Leavengood, Dauval &amp Boyle, P.A. is a full-service law firm that primarily helps individuals and small business with their debts. If you are in need of assistance or counsel, please feel free to call Leavengood, Dauval &amp Boyle, P.A. for a free consultation with one of its bankruptcy attorneys. (727) 327-3328. www.LeavenLaw.com.