What Is a Chapter 20 Bankruptcy?

The bankruptcy code does not have a "Chapter 20" option.

The bankruptcy code does not have a "Chapter 20" option. It is not technically a chapter of bankruptcy, but rather a valid technique of filing a chapter 7 case and following it with a chapter 13 case. It might seem odd to file two bankruptcies, but there are situations where this could make a lot of sense.

Chapter 7 bankruptcy is also known as "liquidation." It is the most common type of bankruptcy that individuals file for, and it is quicker and less expensive than Chapter 13.

Filing Chapter 7 involves appointment of a trustee, and liquidation (sale) of non-exempt property in order to pay off creditors. Since most property that is considered "essential" is actually exempted, debtors usually get to keep most or all of their property. However, it is important to understand that losing some possessions is a possibility when declaring Chapter 7 bankruptcy.

Chapter 13 bankruptcy is considered "reorganization." Rather than selling off assets, it involves creating repayment plans to keep secured assets such as houses or cars, or allowing time to come up with an alternative plan to dispose of an asset, for example, allowing time for the debtor to negotiate a short sale of their home.

You may want to use the "Chapter 20" technique if you have too much debt to file a chapter 13, but still need to restructure some of your debts.

Instead of filing an expensive chapter 11 case, you could file a chapter 7 to settle some of your debts and get below the debt limits for chapter 13. Since your unsecured debts would be cleared, you'd know that any payments made in the chapter 13 filing will go to secured debts or priority debts (like taxes) that you can't discharge.

In chapter 13, you can do several things you can't in chapter 7. You can:

  • strip off wholly unsecured liens from your residence
  • lower the interest rate on your car loan
  • reduce the amount owed on some secured debts down to the value of the asset
  • restructure the payments of non-dischargeable debts like taxes or student loans

This is a great way to deal with liens that remain after your chapter 7 case.

One particular benefit of filing the chapter 7 first is that you will not have any unsecured debts to repay in a chapter 13. This is important, especially if you expect your income to increase while you're in chapter 13. Normally, if your income increases, the court can make you increase your plan payment. They may still do so, but by discharging your unsecured debts in chapter 7 first, you limit the amount you can be required to repay.

A chapter 20 strategy can provide substantial benefits, but it requires more planning than simply filing a single bankruptcy case. You'll want to speak with your attorney to see if this would be a good strategy for you.

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