The U.S. Court of Appeals, Eleventh Circuit, ruled that in a chapter 13 case filed within four years of a previous chapter 7 case (a so-called “chapter 20″), the chapter 13 plan could strip a completely unsecured junior mortgage. Wells Fargo Bank v. Scantling, No. 13-10558 (11th Cir. June 18, 2014). In such chapter 13 plans, the junior mortgage is eliminated and never has to be paid back.
The lack of a discharge from debt at the conclusion of the chapter 13 case, due its having been filed on the heels of a chapter 7, was not viewed as a problem by the appeals court.
The debtor filed for chapter 7 on November 27, 2009, and received a discharge. On January 1, 2011, the debtor filed for chapter 13, listing the home’s value at $118,500. The first mortgage had a balance of $121,808; the second mortgage $79,369; and the third mortgage $24,416.
These figures indicated that the second and third mortgages were not secured by any actual value of the home. This was due to the first mortgage balance being in excess of the home’s value.