Johnson v. Home State Bank, 501 U.S. 78 (1991)
Bankruptcy can serve a wide variety of purposes. It can be a way to eliminate unmanageable unsecured debt such as credit card debt. It can also serve to resolve issues with mortgage delinquencies. And it sometimes does both. An important Supreme Court decision from 1991 clarified the applicability and function of a chapter 13 in dealing with mortgage delinquencies after a chapter 7 discharge. A chapter 13 following a chapter 7 is sometimes colloquially called a chapter 20 (7+13=20), although there is no chapter 20 under the bankruptcy code.
In Johnson v. Home State Bank, an individual received a discharge in a chapter 7, which eliminated his liability on the underlying mortgage note. The lender resumed foreclosure, and the debtor then filed a second bankruptcy under chapter 13 of the Bankruptcy Code, proposing to pay the bank’s judgment in installments over time.
The Supreme Court held that mortgage liens remaining after Chapter 7 discharge are still “claims” under the Bankruptcy Code and can be included in Chapter 13 reorganization plans.
Even after personal liability is discharged, creditors retain both a “right to payment” through property sale proceeds and a “right to an equitable remedy” through foreclosure. While the Court noted that creditor protections remain in place through chapter 13’s good faith and feasibility requirements (which were modified under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act subsequent to this decision), the decision was an important precedent for debtors seeking to save their homes from foreclosure through bankruptcy reorganization after receiving discharges in prior chapter 7 filings.