Should You File for Chapter 13 Bankruptcy After a Chapter 7 Discharge?

If filing for Chapter 7 bankruptcy won’t eliminate all your debts, you might be able to pay what remains—such as a tax bill or back child support—over three to five years using Chapter 13. Read on to learn about filing Chapter 13 after receiving a Chapter 7 debt "discharge," the order erasing qualifying debt.

What to Expect From a Chapter 7 Discharge

You can discharge almost all debts in Chapter 7, but there are exceptions. You'll remain responsible for priority debts, such as support obligations and recently incurred taxes.

Student loans, government fines, and debts incurred by fraud are also examples of debts that are automatically “nondischargeable” or that the bankruptcy court can declare nondischargeable. (If you’re unfamiliar with these debt categories, “Secured, Unsecured, and Priority Debts” provides detailed descriptions below.)

However, these debts can be sizeable and challenging to pay, even after eliminating qualifying debts in Chapter 7. Some filers workaround this problem by filing "Chapter 20" bankruptcy.

What Is “Chapter 20” Bankruptcy?

It's an informal name for filing for Chapter 13 bankruptcy shortly after receiving a Chapter 7 discharge. It's an approach primarily used to pay off priority debts over time. The most common of these are tax obligations and domestic support arrears, such as alimony and child support.

The benefit of the strategy is that it forces a creditor into a three- to five-year Chapter 13 repayment plan. During that time, the creditor can’t collect using bank levies, wage garnishments, and property seizures.

However, it comes at a price. You must pay the Chapter 13 trustee a fee of up to 10% and any interest that accrues during the payment period. Also, you won’t receive another discharge because lengthy waiting period rules prevent people from erasing debt soon after a previous bankruptcy filing. However, you won't need one because you will have already discharged all qualifying debt in Chapter 7.

Not all courts allow Chapter 20 filings, but it can be helpful when available. You’ll likely want to consult a local bankruptcy lawyer about your court’s practices.

When to Avoid Chapter 7 and File Only Chapter 13

While filing Chapter 20 bankruptcy can be a great strategy, sometimes a simple Chapter 13 filing is the better option.

You Have Debt Discharged Only in Chapter 13

Because you can only receive one discharge within a short period, if you have debts that are dischargeable in Chapter 13 but not Chapter 7, you might want to skip Chapter 7 and file for Chapter 13 directly. For instance, obligations relating to property division in a marital settlement agreement can be discharged in Chapter 13 but not Chapter 7. Also, only Chapter 13 will discharge credit card balances incurred when paying tax debt.

What you do will likely depend on how much you owe on particular debts, so you’ll want to learn about all the debts discharged in Chapter 13 but not Chapter 7.

You Have Home, Car, or Other Secured Debt Issues

Unlike Chapter 7, filing for Chapter 13 bankruptcy can help you save your home or vehicle if you face foreclosure or repossession. In Chapter 13, you can catch up on missed payments through a three- or five-year repayment plan.

By contrast, if you were to file for Chapter 7 first, you might lose the house or car before you could file for Chapter 13. Here’s why.

To remain in your house in Chapter 7, you would need to be current on your mortgage, able to exempt all home equity, and able to maintain payments afterward. (The same criteria would apply to vehicles and other collateral that secures debt.) If you were behind on the payment when you filed for Chapter 7, the lender could ask the court to lift the automatic stay that stops collection actions to allow the lender to foreclose. Because the bankruptcy court typically grants such motions, you could lose the home during the Chapter 7 case.

But that's not the only pitfall you might encounter. Suppose you can't protect your home equity with a bankruptcy exemption. In that case, the Chapter 7 trustee would sell the house for the benefit of creditors. Again, you’d lose the home during the Chapter 7 process before you could file for Chapter 13.

Learn more about protecting homes in bankruptcy.