Sometimes financial problems are too complex to be solved by Chapter 7 or Chapter 13 alone. That’s where Chapter 20 comes in. Chapter 20 is not an official chapter under the bankruptcy code, but a strategy where two bankruptcies are filed in quick succession -- a Chapter 7 followed by a Chapter 13 -- to resolve financial problems that cannot be adequately dealt with by filing under just one chapter. Read on to find out when filing two bankruptcies might be better than one.
When a Chapter 7 Does Not Provide Complete Relief
In Chapter 7 bankruptcy, the bankruptcy trustee sells all of your property that is not exempt and uses the proceeds to pay your creditors. (Many debtors are able to keep most or all of their property because it is exempt.) In return, your unsecured debts are discharged (there are some exceptions). You receive the discharge quickly -- usually within three to four months. (Learn how Chapter 7 bankruptcy works.)
However, although Chapter 7 bankruptcy is often the best option for many people, it won't discharge certain types of debts, such as child support, taxes, or student loan debt. Nor will it allow you to catch up on mortgage or car payments.
(For more information on debts that are not discharged in Chapter 7, see Debts that Survive Chapter 7 Bankruptcy)
When a Chapter 13 Is Not Possible
Chapter 13 may provide you with extra time to pay off debts like child support student loans, or back taxes. You do this through the Chapter 13 repayment plan, that lasts between three and five years. (Learn how Chapter 13 bankruptcy works.)
However, there are downsides to Chapter 13 as well. First of all, if your debts are too high, you won't qualify for Chapter 13. And even if you are eligible to file, it might not be a perfect solution. For example, your repayment plan will often pay student loan debt in prorated payments along with other unsecured claims (such as credit cards) during the Chapter 13. The payments on student loans are often less than the payments you were required to make pre-bankruptcy. This means that you can actually fall farther behind on student loans while you are paying under your plan.
Advantages of a Chapter 20 Bankruptcy
You may be able to use the Chapter 20 strategy to get more complete relief for your situation. Here's how it can work:
Filing for Chapter 7 first allows you to eliminate your dischargeable unsecured debts. This could bring you under the Chapter 13 debt limit and make you eligible to use Chapter 13 to catch up on mortgage or car payments. If you need the Chapter 13 to catch up on student loan payments, filing a Chapter 7 first can result in a greater portion of your plan payment going to pay down your student loans. In some districts, you can also take advantage of lien stripping or cram down in the Chapter 13 case. (Learn about lien stripping in Chapter 13 bankruptcy and cram down in Chapter 13.)
Requirements and Procedure for a Chapter 20
Not everyone is eligible to file a Chapter 7 or 13. If you do qualify, however, the procedure is simple.
Requirements. You must be eligible to file a Chapter 7 and receive a discharge. This means you can’t have filed a Chapter 13 bankruptcy within the six years immediately prior, or a Chapter 7 bankruptcy within the eight years immediately prior. You must pass the means test or not be subject to the means test (under median income or primarily non-consumer debts). For Chapter 13, you must have regular income to support the plan payments.
Procedure. The procedure is simple. First you file for Chapter 7 bankruptcy. After it is complete (or if your district allows, once your receive a discharge), you file for Chapter 13 bankruptcy. You must list all of your debts in the Chapter 7. In the Chapter 13, you list only secured debt and debt that was not discharged in the Chapter 7.
Limitations of a Chapter 20
While this strategy can be effective in providing relief for some financial situations, there are limitations to using the Chapter 20 strategy.
Multiple Filings Mean No Discharge in the Chapter 13
Once you receive a discharge in the Chapter 7, you are not eligible to receive a discharge in a Chapter 13 unless four years have passed since you filed the Chapter 7. When you are using the Chapter 20 strategy, the Chapter 13 is filed to get more time to pay debts that could not be discharged in the Chapter 7 or to bring mortgages or car loans current, and not to receive a second discharge. (To learn more, see Multiple Bankruptcy Filings.)
Lien Stripping and Cram Down May Not Be Available
In some districts, courts will not allow you to use lien stripping or cram down in Chapter 13 when you are not eligible for a discharge in that chapter.
Non-Exempt Assets with Equity Will Not Survive the Chapter 7
You can’t use a Chapter 20 if you want to save your business, keep multiple properties with non-exempt equity, or to save other non-exempt assets. Anything over your allowed exemptions will be lost to the Chapter 7 trustee and no longer be yours by the time you file the Chapter 13.