A Chapter 20 bankruptcy is the strategy of filing a Chapter 7 bankruptcy to discharge unsecured debts and immediately following up with a Chapter 13 after debts have been reduced. The 2005 Bankruptcy Reform Act limits Chapter 20 filings by placing a general limit on success bankruptcies. Currently, a Chapter 7 bankruptcy can be filed once every two years and a Chapter 13 can be filed only after three years have passed from the closing of a Chapter 7 case. Still bankruptcy seekers attempt to circumvent these restrictions.
Benefits of "Chapter 20" Bankruptcy
Chapter 20 combines the benefits of both Chapter 7 and a Chapter 13. A Chapter 7 filing automatically stays creditors from pursuing collection once they receive proper notice. If a creditor does not cease pursuit, the petitioner has legal rights and protections against this misconduct. If the petitioner passes the means test as well as other stipulations, he or she will receive a discharge of debts. Immediately following the Chapter 7 discharge, the petitioner then files for Chapter 13. In some instances, courts have allowed petitioners to file Chapter 13 even while their Chapter 7 bankruptcies were pending, circumventing the Code's requirement. However, most courts require that the Chapter 7 case is closed first to prevent confusions and difficulties arising from dealing with concurrent cases.
Chapter 13 allows for certain discharges not allowed under Chapter 7. These include:
- court fees;
- cooperative, condominium and homeowners' association fees;
- certain marital debts arising from a divorce or separation agreement;
- debts from retirement plan loans or loans used to satisfy non-dischargeable taxes;
- certain debts not discharged from a previous bankruptcy, including non-dischargeable tax debts; debts not satisfied in a previous bankruptcy that would have under certain circumstances been dischargeable; and educational debts.
Disadvantages of Chapter 20
A "Chapter 20" filing will take longer to give an individual "a fresh start" because of the requisite time separation between the Chapter 7 and Chapter 13 filings. Additionally, both filings require filing costs.
"Chapter 20" debtors who miss just one mortgage payment after filing a "Chapter 7" petition may not be able to save their homes in the subsequent "Chapter 13" filing. To redeem any property under Chapter 20, the debtor has to make regular payments on the debt without any arrearages. A debtor has to continue payments without either redeeming the property or signing a Reaffirmation Agreement. Only after receiving the Chapter 7 discharge, can the debtor then file for Chapter 13 case, and be able to redeem the property in installment payments.
Impediments
The main impediment to doing a Chapter 20 procedure is the appearance of bad faith. Secured creditors can argue that the petitioner is seeking to stall or defraud. Also, the reformed bankruptcy laws make it that much harder to do a Chapter 20 because of the means test requirement under Chapter 7. If a petitioner's income is too high for a Chapter 7, he or she will have to do Chapter 13 alone. Additionally, if a secured creditor of real property can show bad faith, the court will grant the creditor a relief from the automatic stay.
Talk with an Attorney
Before filing a Chapter 20 bankruptcy, you should know that not every court will allow this stratagem. Additionally, the reformed bankruptcy laws make it that much harder to do a Chapter 20. Talk with a bankruptcy attorney to determine your bankruptcy options.
