In this article, we discuss Chapter 20 bankruptcy and answer the following questions:
- What is Chapter 20 bankruptcy?
- What are the benefits and drawbacks of filing only Chapter 7 bankruptcy?
- What are the benefits and drawbacks of filing only Chapter 13 bankruptcy?
- What are the benefits of Chapter 20 bankruptcy?
- What are the drawbacks of Chapter 20 bankruptcy?
What is Chapter 20 bankruptcy?
Every bankruptcy situation is unique and sometimes Chapter 7 or Chapter 13 bankruptcy alone is not enough to resolve an individual or family’s financial and debt burdens. Enter the less common, but still very effective Chapter 20 bankruptcy. Chapter 20 bankruptcy is an informal term that refers to filing Chapter 13 bankruptcy immediately after filing Chapter 7 bankruptcy. This allows unsecured debt, such as credit card debt, to be discharged in Chapter 7 bankruptcy and then secured debt, such as a mortgage or car loan to be crammed down and restructured in Chapter 13 bankruptcy. This may sound enticing, and many might wonder why more people don’t employ this unusual form of bankruptcy, but some courts don’t allow Chapter 20 bankruptcy and for those that do the bankruptcy trustee often objects to the process.
What are the Benefits and Drawbacks of Filing Only Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is the most common among individuals and families for many reasons:
- The process is quick and most debts are wiped clean;
- You remove all unsecured debts and don’t have to worry about tying up your income over the next 3 to 5 years with a payment plan; and
- There are no limits on the amount of debt you can have to qualify.
But Chapter 7 has its drawbacks and isn’t always the best option:
- Chapter 7 bankruptcy won’t address mortgage or car loan arrearages;
- Beyond the automatic stay, you can’t force creditors to give you extra time to pay your nondischargeable debts; and
- Unsecured second mortgages are not always discharged in Chapter 7 bankruptcy.
To learn more about preparing for bankruptcy and understanding the process of Chapter 7 go here and here.
What are the Benefits and Drawbacks of Filing Only Chapter 13 Bankruptcy?
Chapter 13 is a great option for those who fail the Means Test and don’t qualify Chapter 7:
- Chapter 13 allows you to cure a car loan or mortgage arrearage over time;
- Strip unsecured second mortgages;
- Cramdown certain secured debts; and
- Force creditors to give you extra time to pay down non-dischargeable debts.
Chapter 13 isn’t always the best option and it’s not available to everyone:
- Chapter 13 is not a rapid process and debts can hang around for longer;
- Instead of a clean slate after Chapter 7, you’ll be tying yourself into a 3 to 5-year plan; and
- You are ineligible if you exceed the debt limits.
What are the Benefits of Chapter 20 Bankruptcy?
Chapter 20 bankruptcy is utilized because the family or individual filing bankruptcy wants to get the combined beneficial effects of both processes. While some courts don’t allow filing chapter 13 shortly after chapter 7 bankruptcy—requiring you to wait for four years—many courts will allow Chapter 13 to be filed before the Chapter 7 case is closed. If Chapter 13 is filed within four years of filing Chapter 7 the filing individual or family will not be eligible for the usual debt discharge under Chapter 13 (since many of their debts will have already been discharged) but they still benefit from the other effects of Chapter 13. Overall, Chapter 20 bankruptcy has many advantages:
- You can use Chapter 7 to wipe out your unsecured debts and get your total debt amount below the cutoff point for qualifying for Chapter 13 bankruptcy. This would allow you to avoid Chapter 11 bankruptcy which can be a much longer and more costly process;
- Chapter 7 bankruptcy can wipe out your unsecured debts allowing you to focus on secured and priority debt in your Chapter 13 restructuring;
- Chapter 20 can help you to reduce the overall length of you Chapter 13 payoff period;
- You can more easily manage larger tax debts through a Chapter 20 bankruptcy;
- Filing Chapter 20 bankruptcy can enable you to cure higher arrearage amounts; and
- You want to strip an unsecured second mortgage (lien stripping).
What are the Drawbacks to Chapter 20 Bankruptcy?
There are some inherent deficits in Chapter 20 bankruptcy, including:
- The Chapter 20 bankruptcy process nullifies the normal Chapter 13 debt discharge;
- The Chapter 20 bankruptcy process may bar you from the normal lien stripping benefits of Chapter 13 bankruptcy;
- The bankruptcy trustee assigned to your case may feel that you are trying to manipulate the bankruptcy system and issue a “bad faith objection” to your Chapter 13 filing. If this happens you will have to provide a convincing reason for needing Chapter 20 bankruptcy beyond not wanting to pay back unsecured debts. If the trustee is not convinced he or she will likely turn down your bankruptcy filing.
The most important first step when contemplating bankruptcy is figuring out which option is the best fit for your situation. A qualified bankruptcy attorney will guide you through the process and figure out which bankruptcy chapter is the best for your financial situation. If you have any questions about bankruptcy, don’t hesitate to give us a call at 630-324-6666.
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