Filing Chapter 7 Before Chapter 13 Bankruptcy: Chapter 20?

Learn the pros and cons of filing for Chapter 13 immediately after receiving a Chapter 7 discharge, a practice known as Chapter 20.

Updated August 20, 2019

A “Chapter 20” bankruptcy isn’t an actual bankruptcy type. It’s an informal name for the practice of filing for Chapter 13 bankruptcy immediately after completing a Chapter 7 case.

Here’s the benefit of filing back to back bankruptcy cases: A debtor can discharge (wipe out) unsecured debts such as credit card balances in Chapter 7. Then, the filer can use Chapter 13 to pay off debts that don’t go away in bankruptcy, like mortgage, car loan, or domestic support arrearages.

But despite its benefits, you can expect the court or trustee to object. And some courts don’t allow Chapter 20 filings at all. Read on to learn more before deciding whether Chapter 20 bankruptcy can work for you.

Benefits of Chapter 20 Bankruptcy

The following are some of the main advantages of using Chapter 20 bankruptcy to discharge and reorganize your debts.

Chapter 20 Can Help With Chapter 13 Qualification

To qualify for Chapter 13 bankruptcy, you currently can’t have more than $ 1,257,850 of unsecured debt or $1,257,850 of secured debt (as of April 1, 2019). If your liabilities exceed these limits, you won't be eligible to file for Chapter 13. You can still use an individual Chapter 11 bankruptcy, but it is significantly more difficult and costly than a Chapter 13.

If you have more unsecured debt than allowed, you might be able to wipe them out in Chapter 7 and get below the debt limits for Chapter 13. But you’ll have to qualify for Chapter 7. Find out if you do by learning about the Chapter 7 means test. And be sure to read the drawbacks discussed below.

Chapter 20 Can Help Pay Priority and Secured Debts

In Chapter 13 bankruptcy, you propose a repayment plan to pay back all or a portion of your debts. Many people file for Chapter 13 bankruptcy to pay off a debt that can't be eliminated in Chapter 7. For instance, in Chapter 13, you can catch up on missed mortgage payments or pay off nondischargeable priority debts, such as recent tax obligations.

Depending on your income, expenses, and assets, you might also be required to pay back a portion of your general unsecured debts—such as credit card debt or medical bills—through your Chapter 13 plan. However, wiping out general unsecured debts through Chapter 7 bankruptcy lets you use all of your disposable income on secured and priority debts in Chapter 13.

Learn about the differences between secured, unsecured, and priority debt.

Drawbacks of Chapter 20 Bankruptcy

Despite its benefits, Chapter 20 has disadvantages, too. Below are common drawbacks of a Chapter 20 bankruptcy.

Filers Won’t Receive a Chapter 13 Discharge

Once you receive a Chapter 7 discharge, you won’t qualify for a Chapter 13 discharge until at least four years pass. The time starts after your Chapter 7 filing date. However, most filers won’t need a Chapter 13 discharge because their qualifying debts will have already been wiped out in Chapter 7.

Lien Stripping Might Not Be Allowed

Filing a Chapter 20 bankruptcy can potentially rob you of the ability to strip your second mortgage in Chapter 13. Here's why.

If your first mortgage balance exceeds the value of your house, your second mortgage is entirely unsecured. In that instance, you typically can get rid of your second mortgage in Chapter 13 (not Chapter 7) through a process called lien stripping. For example, suppose you owed $100,000 on a first mortgage and $50,000 on a second, but your home was only worth $99,000. You could strip the wholly unsecured second mortgage.

Because you can't receive a discharge immediately after filing for Chapter 7, some jurisdictions won’t allow the stripping of an unsecured junior mortgage lien in the Chapter 13 portion of a Chapter 20 case.

You can find out more about how this works in Lien Stripping in Chapter 13.

Bad Faith Objections

If the only reason you are filing a Chapter 20 bankruptcy is to avoid paying back general unsecured creditors, pay heed. In Chapter 13, the court or bankruptcy trustee might object to your Chapter 13 as a bad faith filing and abuse of the bankruptcy system.

If you receive a bad faith objection to your bankruptcy, you will have to show that you had a valid reason for filing a Chapter 20 bankruptcy. The reason must be something other than to avoid paying back a portion of your unsecured debts.

You can learn about how the court determines whether you’re taking advantage of the system by reading Bad Faith Bankruptcy Filings.

Meet With a Bankruptcy Lawyer

Remember that bankruptcy law didn’t create Chapter 20 filings. As discussed above, it’s considered a strategy often used to obtain an advantage over creditors—a tactic frowned upon by bankruptcy courts. Prudence dictates that you should always consult with a knowledgeable local bankruptcy attorney before using a Chapter 20 bankruptcy strategy.

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