What is a “Chapter 20” Bankruptcy and What is it for?

Chapter 20,” as it is commonly known, is the process of filing for Chapter 7 bankruptcy and then filing for Chapter 13 bankruptcy in order to take advantage of the benefits of each and circumvent problems that may arise for some individuals if they were to file only for Chapter 7 or 13. Technically, there is no “Chapter 20” in the bankruptcy laws. It is simply bankruptcy jargon for “adding” Chapter 13 to Chapter 7 (7 + 13 = 20).

The Chapter 20 process is not for everyone, especially since filing for bankruptcy twice can be expensive and stressful. A recent decision also demonstrates that good faith is necessary in the filings, meaning the debtor must show he or she is not abusing the bankruptcy laws. But some individuals need the benefits of both forms of bankruptcy to truly achieve financial stability. As you can see below, there are some things you can do in Chapter 7 that you can’t do in Chapter 13 and vice versa.

Maryland Chapter 7 Bankruptcy Advantages:

• Complete discharge of all unsecured debt (except support obligations, taxes and a few other non-dischargeable debts), including credit cards, medical debts, and most judgments
• No debt limits (too much debt can disqualify a person for Chapter 13 bankruptcy)
• Income is not tied up in repayment plan for 3 to 5 years after discharge is complete as it is in Chapter 13
• All collection efforts by creditors must be suspended until bankruptcy case is discharged, except secured debts and non-dischargeable debts for which the stay may be lifted by the court

Maryland Chapter 13 Bankruptcy Advantages:

• Debtor can force creditors to allow payment over time for arrearages on a mortgage or secured loan
• Pay non-dischargeable debts over more time
• Debtor can force creditors to modify interest rates and number of payments to better fit the debtor’s ability to pay
• Strip liens and under-secured second mortgages from property
• Property securing a mortgage or other loan is not subject to foreclosure or repossession as they are under Chapter 7
• All collection efforts by creditors must be suspended until bankruptcy cases is closed and the repayment plan complete, including secured debts and non-dischargeable debts
• All unsecured debts remaining after the repayment plan is complete are discharged, except support obligations, tax debts and other non-dischargeable debts — however, if Chapter 13 is filed less than four years after filing Chapter 7, as in a Chapter 20 scenario, this discharge does not take place

Maryland Chapter 20 Bankruptcy Strategies

If a debtor cannot qualify for a Chapter 13 bankruptcy because they have too much debt, filing Chapter 7 first can eliminate most unsecured debts. Then they may be able to qualify for Chapter 13 and initiate a repayment plan to pay off secured debts and non-dischargeable debts. They can also modify the terms of those debts so they can be paid off over a longer period of time and so the payments are more manageable. it is important to consider that good faith is required in the commencement and administration of chapter 20 cases. Courts consider four factors, namely the proximity and time of the ch 13 filing to the ch 7 filing, whether the debtor has some change in circumstance between the filing, whether the two filings accomplish a result that is not permitted in either standing alone, and whether the two filings treat creditors in a fundamentally fair and equitable manner. Also consider whether the two cases are a manipulation of the bankruptcy system.

This strategy would also work for someone who prefers to pay back loans under Chapter 13 but doesn’t have enough discretionary income to do so because of other debts. By clearing out some of the other debts, more income is available to apply toward a repayment plan.

Someone who files Chapter 7 bankruptcy and completes the discharge process may find they also need to file Chapter 13 to prevent foreclosure or repossession on a mortgage or secured loan. Or the debtor may find that the remaining secured and non-dischargeable debts are still too much to handle and Chapter 13 is necessary to give them more time and more ability to pay those debts.

A Chapter 20 bankruptcy strategy is also useful for someone who needs to eliminate liens or a second mortgage from real estate they own. If the debtor files Chapter 7 bankruptcy, the discharge will not include liens or mortgages because they are secured debt. In Chapter 13 bankruptcy, however, if a debtor owes more on their mortgage than the property is worth, additional mortgages and liens can be “stripped.” A stripped lien or mortgage is treated as an unsecured loan and is discharged after completion of the repayment plan. Usually, a Chapter 13 debtor ends up paying little or nothing on stripped mortgages and liens. In a chapter 20 situation, the chapter 13 debtor pays nothing on any stripped mortgage debt because the debt was previously discharged in a chapter 7 case.

Determining whether a mortgage or lien can be stripped depends on how much is owed compared to the value of the property. If the value of the first mortgage is more than the property is worth, i.e. a $300,000 mortgage on a $250,000 house, then all additional mortgages and consensual or judicial liens can be stripped. But if the house is worth more than the first mortgage, i.e. a $300,000 mortgage on a $350,000 house, then the next mortgage or lien cannot be stripped – even if the total debt is worth more than the property. If the next mortgage still does not consume the total value of the property, i.e. a $300,000 mortgage and a $25,000 second mortgage on a $350,000 house, then the third mortgage or lien cannot be stripped. And so it goes on down the line. An important consideration is your desire and ability to complete your chapter 13 plan, because even if you have a lien that is avoided the avoidance wont' become permanent unless and until you complete your chapter 13 payments.

Chapter 20 isn’t for Everyone

At first glance, it may seem that a Chapter 20 bankruptcy strategy would benefit everyone who needs to file bankruptcy. However, there are qualifications for being allowed to file Chapter 13 after completing Chapter 7 bankruptcy. The most important of these is that you cannot be eligible for Chapter 13 bankruptcy at the time you file for Chapter 7 bankruptcy. If you were eligible for Chapter 13 but chose to file Chapter 7, you won’t be allowed to file Chapter 13 once the Chapter 7 case is closed. If you attempt to do this even though you aren’t eligible, your case will get dismissed.

Another important note about Chapter 20 strategies is that if you file Chapter 13 less than four years after completing a Chapter 7 bankruptcy, you won’t be able to discharge any additional unsecured debt, except stripped liens and mortgages, at the conclusion of your Chapter 13 repayment plan as would normally be the case. So, if you file Chapter 13 three years after filing Chapter 7 and you rack up new debt on some credit cards, those credit card debts cannot be discharged. Usually, Chapter 20 debtors file Chapter 13 immediately upon closure of the Chapter 7 case and sometimes before the Chapter 7 case is closed.

Is a Chapter 20 Bankruptcy Strategy Right for You?

If you are considering bankruptcy and think you can benefit from filing both Chapter 7 and Chapter 13, be sure to discuss your situation with an experienced bankruptcy attorney. Your Maryland bankruptcy attorney can help you determine whether a Chapter 20 strategy is right for you and help you develop a plan for ensuring that the strategy works to your benefit.

Maryland bankruptcy attorney John Burns and his firm can assist in evaluating your financial situation and determine whether you’ll be best served by filing for Chapter 7, Chapter 13 or both. Call our office at 301-441-8780 to schedule an appointment.