by: Baran Bulkat, Attorney
A “Chapter 20” bankruptcy is the practice of filing for Chapter 13 bankruptcy immediately after completing a Chapter 7 case. A Chapter 20 bankruptcy can allow debtors to discharge their unsecured debts through a Chapter 7 and then file for Chapter 13 to catch up on mortgage payments or pay off nondischargeable priority debts. But despite its benefits, a Chapter 20 also has many drawbacks and can be subject to bad faith filing objections. Read on to learn more about whether Chapter 20 bankruptcy can work for you.
The following are some of the main benefits of using Chapter 20 bankruptcy to discharge and reorganize your debts.
To qualify for Chapter 13 bankruptcy, you currently can’t have more than $360,475 of unsecured or $1,081,400 of secured debt. If your liabilities exceed these limits, you will not be eligible to file for Chapter 13 bankruptcy (you can still file for an individual Chapter 11 bankruptcy but it is significantly more difficult and costly than a Chapter 13).
If you can’t file for Chapter 13 bankruptcy because you have too much unsecured debt, you may be able to eliminate or reduce your unsecured debts and get them below the debt limits for Chapter 13 bankruptcy by filing a Chapter 7 bankruptcy first (if you otherwise qualify).
In Chapter 13 bankruptcy, you propose a repayment plan to pay back all or a portion of your debts. Most people file for Chapter 13 bankruptcy to catch up on missed mortgage payments or pay off their nondischargeable priority debts (such as recent tax obligations) that can’t be eliminated through Chapter 7 bankruptcy.
Depending on your income, expenses, and assets, you may 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, by wiping out your general unsecured debts through Chapter 7 bankruptcy prior to filing your Chapter 13, you can focus on paying back only your secured and priority debts.
Despite its benefits, Chapter 20 bankruptcy also has many disadvantages. Below, we discuss some of the most common drawbacks of a Chapter 20 bankruptcy.
Once you receive a Chapter 7 discharge, you can’t receive a discharge in your Chapter 13 unless the case is filed at least four years after your Chapter 7 filing date. For most debtors, this doesn’t make a difference because their debts have already been discharged in the Chapter 7. However, in some jurisdictions, you may not be able to get rid of your second mortgage in Chapter 13 bankruptcy through lien stripping if you are not entitled to a discharge (discussed below).
If your first mortgage balance exceeds the value of your house (meaning your second mortgage is entirely unsecured), you may be able to get rid of your second mortgage through a process called lien stripping in Chapter 13 bankruptcy. Lien stripping is not available in Chapter 7 bankruptcy. See Lien Stripping in Chapter 13 for more on how this works.
At this time, bankruptcy courts are divided as to whether you can use lien stripping in a Chapter 20 bankruptcy. While some courts allow it, many courts argue that you need to be eligible for a Chapter 13 discharge before you can strip your second mortgage (or other junior lien) from your home. This means that using a Chapter 20 bankruptcy can potentially rob you of the ability to strip your second mortgage in your Chapter 13. As a result, consider talking to a knowledgeable bankruptcy attorney in your area before using a Chapter 20 bankruptcy strategy.
If the only reason you are filing a Chapter 20 bankruptcy is to avoid paying back general unsecured creditors in your Chapter 13, the court or your bankruptcy trustee may 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 other than just to avoid paying back a portion of your unsecured debts.
See Bad Faith Bankruptcy Filings to learn how the court determines whether you're trying to take advantage of the bankruptcy system.