(CN) - The ability to permanently dismiss foreclosure proceedings is still available to debtors who seek Chapter 7 bankruptcy immediately followed by Chapter 13 relief, the Ninth Circuit ruled Thursday.
Though the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) of 2005 prevents these so-called "Chapter 20" debtors from successive discharges, a three-judge panel of the Ninth Circuit said Thursday that "nothing prevents a debtor from taking advantage of the other Chapter 13 tools available to him."
Even lien-voidance provisions that can permanently bar creditors from foreclosing are not applicable, the court found.
The ruling affirms the decision of a bankruptcy judge and a federal district judge in Washington to disallow HSBC's lien on the home of Chapter 20 debtors Robert and Darlene Blendheim.
The last judge to deny HSBC relief had said that enforcing the bank's lien against the Blendheims "creates an extremely harsh result: a debtor who successfully completed a Chapter 13 plan, obeying all the requirements approved by the court, would see many of his debts spring back to life."
Affirming this decision Thursday, the three-judge panel in Seattle called it "undisputed that HSBC's claim was not allowed."
HSBC timely filed the lien claim, but failed to timely respond when the bankruptcy court denied the claim, according to the 47-page opinion.
"Where a claim is timely filed and objected to, on the other hand, disallowance is not automatic," Judge Jay Bybee wrote for the court. "This case is a good example: HSBC timely filed its proof of claim, received service of the Blendheims' objection, and then had a full and fair opportunity to contest the disallowance of its claim - it simply chose not to."
The Bankruptcy Code allows some previously voided liens to be reinstated at the conclusion of a Chapter 13 proceeding, but the panel rejected HSBC's argument that a discharge is the only way to avoid this.
"If correct, this would create an insurmountable obstacle for 'Chapter 20' debtors, like the Blendheims, who are statutorily ineligible to obtain a discharge, having filed for Chapter 13 reorganization within four years of obtaining a discharge under Chapter 7," Bybee wrote.
Since the closure of Chapter 13 proceedings void liens as well, the panel found that HSBC's theory rests upon a "fatal flaw" that a Chapter 13 case must end in conversion, dismissal or discharge.
The panel also denied HSBC's claim that permitting the Blendheims to void the bank's lien would subvert Congress' intention with the BAPCPA.
"Had Congress wished to prevent Chapter 7 debtors from having a second bite at the bankruptcy apple, then it could have prohibited Chapter 7 debtors from filing for Chapter 13 bankruptcy entirely," Bybee wrote.
"Our interpretation gives full effect to Congress's intent to prevent abusive serial filings and successive discharges through BAPCPA," he added. "Prohibiting successive discharges helps curb abuse of the bankruptcy system by ensuring that a debtor once granted a discharge of debt is not granted yet a second discharge just a few years later. A debtor who has racked up significant credit card debt and received a Chapter 7 discharge, for example, will not obtain a second clean slate upon the filing of a Chapter 13 petition. Further, we agree with the district court that reaching the contrary conclusion would create 'an extremely harsh result' that is inconsistent with the Bankruptcy Code's text and purpose."
As for HSBC's due-process claim, Bybee said the record showed "HSBC's rights were honored at every turn."
The panel also found the Blendheims did not abuse the bankruptcy system and filed the petitions in good faith.
For good measure, the court added tucked another win for the Blendheims into the decision. Though Chief U.S. District Judge Marsha Pechman denied the couple attorneys' fees, the Ninth Circuit said this issue should first have gone before the bankruptcy court.
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