A recent decision by the Ninth Circuit has upheld the right of so-called “Chapter 20” debtors to avail themselves of the mechanism of lien avoidance.  The case is In re Blendheim, 803 F.3d 477 (2015).

Robert and Darlene Blendheim are commonly known as “Chapter 20” debtors. They obtained a Chapter 7 discharge, and the next day filed a Chapter 13 bankruptcy.  They eventually asked the court to avoid one of the liens on their house.  This is known as “lien avoidance” or “lien stripping.” Ordinarily, the Bankruptcy Code permits Chapter 13 debtors to void or modify certain creditor liens on the debtor’s property, permanently barring the creditor from foreclosing on that property. However, a 2005 amendment to the Bankruptcy Code bars Chapter 20 debtors from receiving a discharge at the conclusion of their Chapter 13 reorganization if they received a Chapter 7 discharge within four years of filing for Chapter 13 relief. 11 U.S.C. § 1328(f).

In this instance, the lower court allowed the debtors to strip the lien.  The bank appealed.  The Ninth Circuit upheld the lien stripping.  The panel held that the voiding of the creditor’s lien was permanent such that the lien would not be resurrected upon the completion of the debtors’ Chapter 13 plan. Agreeing with the Fourth and Eleventh Circuits, the panel held that 11 U.S.C. § 1328(f), enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, did not render Chapter 20 debtors ineligible to void liens permanently upon the completion of their Chapter 13 plans. The panel concluded that a discharge is not necessary to close a Chapter 13 case, and lien voidance does not subvert Congress’s intent in enacting BAPCPA.

The panel also held that the voiding of the lien comported with due process because the creditor received notice that its rights might be affected when the debtors objected to its proof of claim.