There is actually no “Chapter 20” in the Bankruptcy Code. It’s a euphemism for the procedure where a debtor files a Chapter 7 case closely followed by a Chapter 13 case. 7+13=20, get it?
Sometimes a Chapter 7 or Chapter 13 case alone just can’t provide all the relief you need. There are advantages and disadvantages of each type of case, and sometimes just one won’t do. Here’s two examples to give you an idea:
Example #1: Your business venture failed, leaving you with $400,000 in business debts; and your home mortgage is six months in arrears and pending foreclosure. On the upside, you have a new job with good income. Your main goal now is to save your house. Chapter 7 would allow you to discharge all the business debt, but not save your house. Chapter 13 would allow you to “cure and maintain” your home mortgage and save your house, but you are not eligible to be a Chapter 13 debtor with so much debt. Enter the Chapter 20 option: you file a Chapter 7 case first and discharge all the business debt. Then, after the Chapter 7 discharge is awarded, you no longer have $400,000 of unsecured debt, and you are eligible to file a Chapter 13 case. Your chapter 13 plan cures your mortgage default and saves your home from foreclosure.
Example #2: Suppose you have big student loan debt left over from college and grad school. Student loans, you know, are not ordinarily dischargeable in bankruptcy (neither Chapter 7 nor Chapter 13). A Chapter 13 case would let you pay your unsecured creditors at an amount and pace you can afford, but the student loans get lumped into the same pool as other unsecured creditors, and only get paid down a little over the plan. You could end up finishing the Chapter 13 plan and still owing the student loans. Enter the Chapter 20 option: you file a Chapter 7 case first and discharge all your other debt. Then, after the Chapter 7 discharge is awarded, you have only one creditor to deal with: the student loan. Your Chapter 13 plan pays off your student loan in full over 5 years. So, even though the student loan is not dischargeable in bankruptcy, bankruptcy gives you a way to get it paid off.
The Best of Both Worlds
Chapter 7 is a quick process and usually provides a discharge of most unsecured debts. But it won’t save secured property from foreclosure or repossession.
Chapter 13 allows a consumer to pay a non-dischargeable debt or cure a delinquent mortgage or car loan in a payment plan. But you must be eligible.
When Chapter 20 May Help
If you file a Chapter 13 bankruptcy case less than four years after receiving a Chapter 7 discharge, you cannot receive another discharge in the Chapter 13 case. But sometimes the discharge isn’t important in the second round. Sometimes, there are more important objectives:
- You need more time to cure a delinquent mortgage or car loan debt
- You have a second or third mortgage on your home
- You have non-dischargeable debt which can be paid off in the Chapter 13 plan
When you file a Chapter 13 case, you get time to cure the secured loan defaults or to pay down debts that are non-dischargeable in Chapter 7, such as tax debts and student loans.
You can also eliminate second and third mortgages in the Chapter 13 case. If a homeowner owes more on a first mortgage than the home is actually worth, Chapter 13 allows the second mortgage to be “stripped.” The underlying debt becomes an unsecured debt and gets paid only a share of the unsecured pool. This is known as “lien stripping.”
What could go wrong?
Although it’s a common practice, many bankruptcy judges don’t like seeing Chapter 20 cases. There is a big potential for abuse and it has a reputation for being invoked in bad faith by debtors trying to defraud their creditors. When utilized correctly, however, a Chapter 20 can provide adequate relief for a consumer. It is not a “first line” defense for ordinary cases. However, it can provide relief to consumers following life-changing events, such as divorce, death, business failure, illness, job changes, etc. Thus, you should consider this only if other options have failed, and proceed cautiously only if you have the guidance of an experienced bankruptcy lawyer.