You may have heard of a Chapter 7 Bankruptcy. And you may have heard of a Chapter 13 Bankruptcy. But you probably have not heard of a “Chapter 20” Bankruptcy. While not technically a chapter of bankruptcy, “Chapter 20” bankruptcy nonetheless is an important strategy when dealing with very specific financial fact patterns.
As I have detailed in many earlier posts, a Chapter 7 Bankruptcy is a liquidation bankruptcy, where you can eliminate most, if not all, of your debt. The time frame usually is about 90 days from start to finish. The second most common type of bankruptcy is a Chapter 13 Bankruptcy, or a “wage earner’s” bankruptcy. A chapter 13 bankruptcy generally lasts between 3 to 5 years, and the consumer makes monthly payments during that period for the benefit of his or her creditors. But what, then, is a “Chapter 20” bankruptcy.
A “Chapter 20” Bankruptcy is more of a procedural matter. Simply stated, it is filing a chapter 7 bankruptcy first, followed by filing a chapter 13 bankruptcy immediately after. Therefore, chapter 7 plus chapter 13 renders a chapter 20, despite the fact that two bankruptcies are being filed separate of one another.
Why would a consumer file a “Chapter 20” bankruptcy? This seems like a lot of work!
There a couple of important situations when filing a “Chapter 20” Bankruptcy is useful. First, there are debt limits to filing a chapter 13 bankruptcy; if you have too much debt, you do not qualify for a chapter 13 bankruptcy. However, if you qualify for and file a chapter 7 bankruptcy, this will eliminate most debts. By eliminating a large portion of your debts first through a chapter 7 bankruptcy filing, you can then move onto filing a chapter 13 bankruptcy. This may be especially useful if you need to avoid a second lien on your property and catch up on mortgage arrears on your primary mortgage, but you can only accomplish this in a chapter 13. Additionally, by filing a “Chapter 20” bankruptcy, this may reduce the time that you are actually in a chapter 13 bankruptcy (as you are no longer focusing on debts eliminated in your chapter 7 filing).
While you will obtain a bankruptcy discharge in a chapter 7 bankruptcy, you will not receive a bankruptcy discharge in an immediately following chapter 13 bankruptcy. But this is okay; we are using the chapter 13 to pay down debt that will not be taken care on in a chapter 7 bankruptcy — hence, a “Chapter 20” bankruptcy.
By filing a “Chapter 20” bankruptcy, you can also focus more of your energy and resources on non-dischargeable debts, such as taxes. For example, if you have $50,000 in medical debt, $20,000 in credit card debt, and $30,000 in non-dischargeable unsecured tax debt (a special type of tax debt), the benefits of a “Chapter 20” bankruptcy become immediately apparent. By filing a chapter 7 bankruptcy first, you will get rid of the medical debt and the credit card debt, but you will be stuck with the tax debt. If you file a chapter 13 on the heels of a chapter 7 (“Chapter 20”), the chapter 7 will take care of the dischargeable debt so that the chapter 13 bankruptcy can focus exclusively on the tax debt (non-dischargeable debt), for which you will have up to 5 years to pay down.
While a “Chapter 20” bankruptcy is not a true chapter of bankruptcy, it is nonetheless a viable strategy when dealing with particular debts and very specific fact patterns. If you are interested in learning more about chapter 7, chapter 13, or even “Chapter 20” bankruptcy, please call today to schedule a free in-office bankruptcy consultation in Eugene.