If you owe too much debt but still need Chapter 13, “Chapter 20” may be your best solution.
How Much Is Too Much Debt?
Chapter 13 “adjustment of debts” has debt limits. A person or couple can’t be in a Chapter 13 case with more than $394,725 in total unsecured debts or more than $1,184,200 in secured debts. (109(e) of the U.S. Bankruptcy Code.)
(These amounts were increased on April 1, 2016 with bankruptcy law’s automatic 3-year inflation adjustment.)
These debt amounts ARE quite high, so they don’t stop most people from filing Chapter 13 if they qualify otherwise. But in some situations you may have more debt than you realize. Examples include if you operated a business, are dealing with major litigation, or are surrendering real estate of significant value. Also, the distinctions between secured and unsecured debt for this purpose are sometimes not what you’d think. So you may have more unsecured debt than you expected, potentially pushing you over that limit.
Needing Chapter 13 While Having Too Much Debt
Chapter 13 comes with many benefits not available under Chapter 7. A big benefit is stretching out payments to certain special creditors while being protected from collection actions by those creditors. This includes mortgage and vehicle loan arrearages, tax debts, and unpaid child and spousal support. Also, sometimes vehicle loans can be “crammed down,” reducing the monthly payment and the total amount to be paid. And second mortgages on your home can sometimes be “stripped off,” potentially saving tens of thousands of dollars. There are a number of other significant benefits unique to Chapter 13.
So if you are over either of the debt limits but would benefit from a Chapter 13 case, it’s worth considering “Chapter 20.”
What’s “Chapter 20”?
There is no Chapter 20 in the Bankruptcy Code. It refers to a strategy in which a Chapter 13 is filed right after your Chapter 7 is completed. (Chapter 7 + Chapter 13 = “Chapter 20.”) The point is to discharge (legally write off) much of your debts through the Chapter 7 case so that your remaining debts fall within the Chapter 13 debt limits. Then you can qualify for the Chapter 13 benefits that you need.
Filing Two Bankruptcies So Close Together
If you file a Chapter 7 case, you would normally have to wait 4 years to file a Chapter 13 case. (Section 1328(e) of the Bankruptcy Code.) The Chapter 7 case discharges most or all of your debts. Then after waiting 4 years you could get a new discharge of your debts in a Chapter 13 case.
So under what circumstances could you file the Chapter 13 case without waiting these 4 years or any time at all? What would be the point of doing so?
You CAN usually file a Chapter 13 case right after the completion of a Chapter 7 case. The point of doing so is NOT to get another discharge of your debts. You just got a discharge of most of your debts from the Chapter 7 case. Rather you then file the Chapter 13 case for its own benefits, including the ones mentioned above. You won’t get a new discharge of your debts at the end of the Chapter 13 case. But since you’d just discharge those debts that can be discharged, you usually wouldn’t need a new one.
Do be aware that bankruptcy judges in different parts of the country have varying attitudes about the appropriateness of this strategy. Bankruptcy courts all follow the same federal Bankruptcy Code, they may sometimes interpret the law differently. A majority of judges allow “Chapter 20,” but sometimes it depends on the circumstances. Talk to your local bankruptcy lawyer about local practices and how they’d be applied to your own unique situation.
“Chapter 20” for Reasons Other than Debt Limits
Even if your debts are not so large that they exceed one of the Chapter 13 debt limits, there are other situations when filing a Chapter 13 right after a Chapter 7 one is worth considering. We’ll cover these in the next blog post.