It’s very common for Nevada homeowners to have more than one underwater mortgage on their homes. Often these second (or more) mortgages are totally underwater. One aspect of the Bankruptcy Code that can work in their favor is what Las Vegas bankruptcy lawyers refer to as “Chapter 20” bankruptcy. The Code doesn’t actually have a Chapter 20; rather, it’s the sum of Chapter 7 and Chapter 13. In other words, petitioners must file bankruptcy twice, first in Chapter 7 and then in Chapter 13. It’s not a conversion; it’s actually two bankruptcies.
People might not feel right about filing bankruptcy twice, but it’s neither abusive nor fraudulent, and it’s certainly not dishonest. The benefit for homeowners is that by filing in Chapter 7, the underwater second (and third, etc.) mortgage is discharged, but the lien to the home remains, meaning debtors must pay on the mortgage or the mortgagee will take the home. By filing in Chapter 13, however, debtors can strip the lien on the second mortgage and will finally be free and clear of it. It’s often a good idea for many people considering Las Vegas bankruptcy, but there are drawbacks:
- You only get one discharge. This usually isn’t the biggest problem, but some debtors might benefit from a Chapter 13 discharge long after the Chapter 7. To be clear, filing in Chapter 13 after Chapter 7 won’t delay the next discharge.
- You will pay more in legal fees. It’s unfortunate but true. Chapter 7 is usually a flat rate cost, but Chapter 13 filings can cost more. It’s something to bear in mind when analyzing the costs and benefits of filing “Chapter 20.”
- It isn’t always worthwhile to strip the second lien. If your income is high enough, or if the second mortgage is small enough, you might end up in the situation in which you are paying on the repayment plan for the full five years, or you’ll pay out enough money to satisfy the second mortgage anyway. In these situations it’s not worth it to go through bankruptcy to strip the lien. It might be more beneficial to negotiate with the mortgagee to settle the mortgage instead.
- If for whatever reason you can’t make the payments on the repayment plan anymore, whether to job loss or illness, all your effort will have been wasted. There is no hardship lien stripping in Chapter 13 the way there is a hardship discharge (which “Chapter 20” won’t allow either for reasons listed in the first reason above).
Knowing when to pursue a Chapter 13 proceeding after a Chapter 7 is one of the many reasons to discuss your case with an experienced Las Vegas bankruptcy lawyer before proceeding.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.