Sometimes a Chapter 7 bankruptcy is not enough. The same is true for a Chapter 13 bankruptcy. The combination of the two bankruptcies, however, may be enough to allow you to handle your debt and get back on your feet again. Chapter 20 bankruptcy combines the two, giving you yet another potential strategy to get out of debt. Though the process has its benefits, it also has its downsides.

At Villamor Law, our bankruptcy attorney wants to make sure that if you file for bankruptcy, you do it right and benefit from it. Sometimes, that may mean doing more than one bankruptcy, but to do so requires adherence to strict rules and regulations. Contact us today at (888) 538-2111 to schedule a consultation and to review your financial situation to help determine what may be best in your unique situation.

What is Chapter 20 Bankruptcy?

Chapter 20 is a term used to informally describe the process of first filing a Chapter 7 bankruptcy, followed by a Chapter 13 bankruptcy. Chapter 20 is not a specific type of bankruptcy itself–there's no Chapter 20 of the Bankruptcy Code.

This process combines the benefits of both types of bankruptcy while navigating the shortcomings of each. 

You can use Chapter 7 to discharge unsecured debts quickly and immediately, without having to enter into a payment plan. But Chapter 7 does not allow time to cure a mortgage arrearage, pay non-dischargeable debts, or strip unsecured second mortgages. 

Chapter 13 allows you to do these things under a repayment plan over three to five years. However, your debts must be under a certain limit to be eligible for Chapter 13. 

There are time limits preventing someone from filing multiple bankruptcy proceedings one after the other to discharge debts. Courts and bankruptcy trustees also sometimes oppose Chapter 20 on the basis that it is an abuse of process. But if you are seeking to reorganize and reduce your debts—rather than discharge them—via Chapter 13 in good faith, then Chapter 20 may be permitted. 

Chapter 20 bankruptcies are not suited to every debtor's situation and are not allowed in every jurisdiction, so it is important to seek legal advice before proceeding with one.

Who Should Consider Chapter 20 Bankruptcy?

As mentioned, Chapter 20 bankruptcy is not appropriate for everyone seeking bankruptcy. There are certain circumstances, however, that make this bankruptcy strategy appealing to some people, and here are three of those situations.

1. You have too much debt but need more time.

There are debt limits to accessing Chapter 13. If your debt exceeds the debt limit for Chapter 13, filing for Chapter 7 bankruptcy first may reduce your overall debt and help you qualify for Chapter 13 later. This then gives you extra time to cure an arrearage on your mortgage or car loan or other debts you cannot discharge under Chapter 7. 

When you file for bankruptcy, an automatic stay is issued by the court, preventing creditors from recovering their debts. Chapter 7 proceedings typically only last a few months, as does the automatic stay. Chapter 13 automatic stays last the length of the repayment plan—three to five years—giving you more time to repay your debts. 

2. You need to access more income to pay an arrearage or non-dischargeable debt.

Filing for Chapter 7 bankruptcy first reduces your unsecured debt, freeing up more of your income to pay arrearages or non-dischargeable debts. In turn, this may help you cure a higher arrearage amount, pay larger tax debts under the repayment plan, or reduce the length of any Chapter 13 repayment schedule. 

3. You want to use lien stripping.

A lien in this situation typically refers to a second or third mortgage on your home, also referred to as junior mortgages. 

Some jurisdictions allow you to use “Chapter 20” to remove unsecured second and third mortgages entirely. Chapter 7 bankruptcy does not allow a debtor to strip away junior mortgages, but courts will allow it in Chapter 13 bankruptcy. 

To qualify, the property must be worth less than the balance of the first mortgage. In other words, the first mortgage must be more than the actual value of the home. So, if the home is worth $400,000, but the mortgage is $450,000, lien stripping will generally be allowed.

How Does Chapter 20 Bankruptcy Work?

To file for Chapter 20 bankruptcy, you first file a Chapter 7 bankruptcy petition to reduce unsecured debts and reduce the overall amount of debt you have. The intention is that by reducing your overall debt, you will then qualify for Chapter 13. Once Chapter 7 is complete, you then file a Chapter 13 petition. 

In some states, you may be able to file a Chapter 13 petition as soon as the Chapter 7 discharge is filed, before the court closes the case. In other states, you may have to wait.

After both Chapter 7 and Chapter 13 are complete, you usually have less debt than those who were only allowed to file either a Chapter 7 or a Chapter 13 bankruptcy.

Pros and Cons of Chapter 20 Bankruptcy

The potential advantages of Chapter 20 bankruptcy are summarized here.

• Chapter 7 allows you to discharge your unsecured debts, then Chapter 13 allows you to repay remaining debts such as a mortgage or car loan in a manner most suitable to your financial situation. 
• Chapter 13 has debt limits to access it. If your debt is too high, filing for Chapter 7 bankruptcy first allows you to reduce your unsecured debts, potentially making you eligible for Chapter 13. 
• By wiping out general unsecured debts in Chapter 7, you can then use your income to pay secured and priority debts under Chapter 13. 

Potential drawbacks also exist and may include the following:

• Chapter 20 bankruptcy is not available in every state. In some jurisdictions, Chapter 20 is viewed as an abuse of the Bankruptcy Code. If a court believes you are not filing for Chapter 13 in good faith, it will not agree to it. 
• For these same reasons, bankruptcy trustees often object to the practice. 
• You may not be able to use Chapter 13 for lien stripping, as the practice is also not allowed in every jurisdiction. 

If you're considering Chapter 20 bankruptcy, it is essential to speak to a bankruptcy attorney about your situation before doing so. At Villamor Law, we will advise you whether it is available and, if so, how it could benefit you. 

Contact Us Today 

Bankruptcy offers a way to get back on track financially. Sometimes, though, Chapter 7 or Chapter 13 is not enough to get you out of economic dire straits. Bankruptcy 20 is a strategy not commonly used, but when it is used, its rewards outweigh any disadvantages. To learn more about it, contact our office today either online using the form or by calling us at (888) 538-2111 to schedule a consultation. We look forward to helping you resolve your debt.