What is a chapter 20 bankruptcy?

twentyIt is really just one bankruptcy followed by another.  It is a chapter 7 followed by a chapter 13 which added together equals 20 so it is called a “chapter 20”.  Most people have heard of bankruptcy chapters 7, 11, and 13 but a chapter 20 is really just a combination of a 7 and a 13 and there is no official chapter 20 that you can file.

In a chapter 20 bankruptcy someone will first file a chapter 7 and get a discharge.  They then decide some time later to file a chapter 13 bankruptcy.  A chapter 20 is sometimes referred to as a “no discharge chapter 20” because the debtor is not entitled to a discharge in the chapter 13 if he filed it within 4 years of his chapter 7 according to section 1328(f) of the bankruptcy code.

One reason why people file a chapter 20 is because of the debt limits of a chapter 13.  Some want to file a chapter 7 to discharge the unsecured debt they owe to bring that debt within the limits of chapter 13.  Chapter 13s have specific debt limits and if you exceed them you could be forced into a chapter 11 which is far more complicated.  One strategy to avoid a chapter 11 is to file a chapter 7 to lessen the debt through the chapter 7 discharge and then do a chapter 13.  This would be an example of a “good faith” reason to file a chapter 20.

Another common reason why they would want to file a chapter 20 is because of the chapter 13 lien strip capability not offered in a chapter 7.  In a chapter 13 homeowners can strip (eliminate) second mortgages if they are completely unsecured.  Second mortgages are completely unsecured if you owe more on your first mortgage than the entire home is worth.  This leaves nothing (no equity in the home) to secure the second mortgage so it is in effect an unsecured debt.

But of course it is a lien that exists and will continue to exist on your house if you do nothing or even if you file a chapter 7 bankruptcy.  The lien will remain on you home virtually forever and the only way to get rid of an unsecured second mortgage it is to strip it off in a chapter 13 bankruptcy.

So some people try to get rid of their credit cards in a chapter 7 bankruptcy and then file a chapter 13 to strip the second mortgage.  If they just filed a chapter 13 without the prior chapter 7 they would have to pay some of the credit cards back in the chapter 13.  So it seems that filing a chapter 7 followed by filing an immediate 13 makes sense right?  After all you save all of those credit card payments you would have to make for 5 years in a chapter 13 right?

Wrong!  You cannot be seen to be manipulating the system just to get rid of your credit cards and then strip a mortgage.  This would be an example of a “bad faith” bankruptcy filing and this would be challenged by the bankruptcy trustees in an adversary proceeding.  If you file one chapter and then another to create a benefit for yourself that would not exist in either chapter then that could be considered bad faith.  So you must not attempt to merely get a credit card discharge and then apply for a lien strip.

This tactic would be considered bad faith because if you filed a chapter 7 you would not be allowed the lien strip.  If you filed just a chapter 13 you would have to make payments to the credit cards for the length of the chapter 13 plan.  The courts will want you to pick one or the other but no both chapter in succession merely to seek maximum benefits.

One way to avoid a possible bad faith challenge to your chapter 20 is to show that there has been a subsequent change in your situation since the filing of the chapter 7.  If for instance you intended to surrender your house at the time of filing the chapter 7 but your situation substantially changes after your chapter 7 discharge then you may have a valid new reason to keep your home.  You could get a divorce or suffer a lessening of income for instance.  Then you could possibly do a chapter 13 to strip the second mortgage and this could prevent a bad faith challenge.  Courts examine chapter 20s carefully though so you should be aware of this increased scrutiny over your case when you attempt one.

It is also possible that housing values change and your second mortgage might become unsecured sometime after your chapter 7 discharges.  If you are in a period where housing values are declining then the value of your house may drop below the value of your first mortgage sometime after your chapter 7 is complete.  Now you can strip the lien in a chapter 13 whereas before you filed the chapter 7 you could not.  This would be a valid circumstance that could defeat a bad faith claim.   There are many other possible good faith circumstances in addition to these mentioned above.

Chapter 20s used to be more common.  Doing a chapter 20 became a problem after the 2005 bankruptcy law was passed.  This law can be interpreted to not allow a chapter 13 discharge unless 4 years have passed since the filing of a chapter 7.  (A second chapter 7 cannot be filed until 8 years have passed since a first chapter 7).  This prohibition is contained in section 1328(f) of the bankruptcy code which relates to discharge.

With this code section in mind the question then becomes how can you receive a discharge from your second mortgage after the chapter 13 plan is completed if section 1328 disallows such a discharge?  This can create problems for you as you proceed with the chapter 20 bankruptcy.

Most courts have maneuvered around this by turning to other sections of the code and they have allowed you to do a chapter 20 anyway.  Remember though that the possibility is still there that you will get a challenge if you attempt to do a chapter 20.  It appears that at this time the law is not completely settled and the courts are not in complete agreement on this issue of allowing a chapter 13 within four years of filing a chapter 7.

It also appears to help if new debt exists.  If some sort of new debt has been acquired post chapter 7 judges apparently like that.  It seems as if there needs to be something to make payments on in the chapter 13 and not just a lien to strip.

Bt I still believe that the safest thing to do though is to not run afoul of section 1328(f) at all.  Just wait the required 4 years after your chapter 7 to file a chapter 13 and strip your lien.  You then won’t be in violation of 1328 and there should be no argument to stop you from filing.  Nobody wants to buy a court challenge or court case when filing bankruptcy.

The additional advantage of waiting the full four years to comply with section 1328 is that it is a longer period in which to argue changed circumstances.  It is harder for anyone to argue bad faith if you waited a full four years after your chapter 7 to file a chapter 13.  This is because people don’t generally plan that long in advance and circumstances do naturally do change considerably in four years.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

 

Twenty photo courtesy of takomabibelot.

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Do I have to go to court if I file bankruptcy?

courthouse 4The answer generally is no you don’t have to go to court for most bankruptcies, especially the chapter 7.  In a chapter 7 bankruptcy you go to a 341 hearing with a bankruptcy trustee presiding but you don’t have to go to court usually.

These hearings are much more informal than a court proceeding and they usually last for only a few minutes.  The trustee will ask you about your assets, your income, and any other questions he or she has about your bankruptcy schedules.

If the trustee sees anything wrong he will call for a continuance of the 341 hearing and ask for clarification or more documentation.  If there is nothing wrong then he will conclude the hearing and you will be done.  With a chapter 7 you will then wait for your discharge and closing of your case.

If the trustee finds something wrong with the case then you could end up in court.  The trustee could file some challenge to your case as could a creditor that does not want his debt discharged.  These challenges are somewhat rare though especially if a competent bankruptcy attorney files your case and thoroughly investigates all aspects of you financial situation beforehand.

These challenges to your case would be addressed by the trustee or the creditor filing an adversary proceeding.  If an adversary proceeding is filed in your case then you probably will appear in court.  These are somewhat rare though and most bankruptcies sail through the 341 hearing and never go near a courtroom.

Another example of a situation that could land you before a bankruptcy judge is the reaffirmation hearing.  A reaffirmation hearing is when you reaffirm a debt for which your personal liability has been discharged in the bankruptcy.

This most often happens in a case where you financed your car.  A car company wants you to in effect sign back up for the debt or they may elect to repossess the car after the bankruptcy stay lifts.  This is especially true if your income is less than your expenses on schedules I and J which is common for chapter 7 debtors who file bankruptcy.

If the trustee wants to object to your discharge then the same could happen and if he wants to take property then he could file an adversary proceeding that could land you in court ut this is very rare.

These things are not all that common though and a good bankruptcy attorney should be able to guide you through the process and advise you on the possibilities of going to court.  Usually though you should only see the 341 hearing room and the bankruptcy trustee for you chapter 7 bankruptcy.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Courthouse photo courtesy of w.marsh.

What is a fraudulent transfer? Did I do something wrong?

I know that fraud sounds bad and fraudulent transfer sounds even worse.  But his term is often used in and out of bankruptcy.  (Sometimes it is referred to as a fraudulent conveyance).  In your bankruptcy you may have gotten a notice that you are being accused of a fraudulent transfer by the bankruptcy trustee.  Fraudulent transfer rules come from section 548 of the bankruptcy code.  But don’t worry, this can be addressed in the bankruptcy and it does not mean that you are guilty of any crime or even that you are a bad person.

This is because they are not (usually) talking about you committing an actual, intentional fraud where you decided to de-fraud someone of their money or property.  They are instead talking about a “constructive fraud” which is one where there is a law against doing these trnasfers but intent to do fraud is not there.  Fraudulent intent is inferred from your actions.

The fraudulent transfer label is used most often when an asset/property has been transferred to someone else under circumstances that look suspicious. This could be real estate or personal property like a car or a piece of jewelry. In the bankruptcy context it occurs when you transfer an asset to someone else, you receive little or nothing in return, and you are insolvent at the time.

You may have had no bad intent at the time you transferred the asset so don’t worry.  You may not even have thought that it was wrong.  I have had clients transfer all kinds of things for many different reasons.  You will need to disclose the transfer to your bankruptcy attorney and describe the circumstances surrounding the transfer any time you have transferred property before a bankruptcy.

And the look back period varies in different states but in California it is four years.  So any property transferred to someone else in the last 4 years for less than its full value needs to be reported in the bankruptcy.  Especially if that transfer leaves you insolvent which means that your liabilities are greater than your assets.  This would not include a property sale to an outside buyer, especially to a buyer who pays full value.  There is a much shorter “look back” period for these transfers and they are usually not questioned by the trustee.

The purpose of the fraudulent transfer rules in bankruptcy is to prevent people from moving assets out of their estate and then going bankrupt on the debts.  Everyone would give their property to family members if they could and then get rid of their debts.  After the case was concluded then they could take the assets back.  This would not be fair to creditors and is not allowed so report these transfers to your attorney in a bankruptcy.

If you received a notification of a fraudulent transfer in a bankruptcy then the trustee could file or possibly has already filed what is called an adversary proceeding.  An adversary proceeding is a complaint filed within a bankruptcy case that is objecting to some aspect of the case.  A trustee will file one if there is a suspected fraudulent transfer of an asset.  He will want to bring this asset back into the estate to sell it for the benefit of the creditors.  (See here for more on adversary proceedings).

The problem here is that the trustee will seek to recover the asset from the person who received it.  If the transferred asset has gone to your relative or friend then they would be drawn into the case so that the trustee could take the asset from that person.  This person, the recipient of the asset, is not going to be too thrilled about this so this is a fairly serious problem.

As with all adversary proceedings this complaint must be answered.  Even if no adversary has been filed you still need to contact an attorney to deal with this issue.  Sometimes a settlement can be worked out but often the proper procedures must be followed timely or a judgment can occur for the entire asset.  If this is a piece of real estate or and expensive piece of jewelry then this can mean a great loss of money if a settlement could have been worked out.

I am bankruptcy attorney in San Diego who handles adversary proceedings for both settlement and trial.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com for more info. about any of these topics.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis!

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

What the heck is an bankruptcy adversary proceeding? Why would someone bring one against me?

Adversary proceedings happen sometimes in bankruptcy cases.  I write about this because a debtor will sometimes file for bankruptcy and then get a notice of an adversary proceeding that has been filed in the case.  This can cause tremendous worry to the client.  But don’t despair, a good attorney will be prepared to handle one of these cases and protect your rights.

An adversary proceeding is literally a lawsuit within a bankruptcy case.  A case within a case.  It means that someone objecting to or fighting about something in the bankruptcy case.  Somebody is letting you know that they have a problem with some aspect of your bankruptcy and they are going intervene in your case to get their problem/objection dealt with.

An adversary proceeding can be brought by just about anyone.   A debtor, a creditor, or even the bankruptcy trustee who is tasked with looking for things like fraud in a bankruptcy case. Almost anyone can file one if they have a legal claim against the debtor or his property.

An adversary proceeding most often happens when someone is intervening in the bankruptcy case to say that some debt is not dischargeable.  Allegations of fraud are the most common reason to file one of these.  Creditors or the trustee himself can file an adversary to challenge the dischargeability of some debt if fraud is suspected.  These are the cases filed under the “exceptions to discharge” under 11 USC § 523(a)(2) of the bankruptcy code.  In addition to fraud, but less often, misrepresentation, false pretenses or other allegations can be pleaded in these cases.

The fraud cases usually come down when a credit card company files an adversary challenging a large charge made on one of your credit cards prior to filing.  These same companies can also object to a large cash advance taken out on a card especially if the cash advance is taken out at a gambling casino.  (I have had a number of these cases over the years as this is more common than one might suspect).

There can be other larger allegations of fraud that can allege fraud over some asset like real estate.  These cases can reach into the millions.  If you find that an adversary was filed against you for very large debt then it is even more important to contact an attorney right away to protect your rights.  With all of these cases is the other side wins then the debt they are challenging will be deemed not discharged in bankruptcy and you will still owe it when the bankruptcy case is finished.  This tends to defeat the whole point of bankruptcy and therefore these cases must be dealt with quickly and correctly.

If it is the trustee who is trying to recover property for the bankruptcy estate (property that was transferred out of the estate prior to filing) then he would file an adversary action alleging fraudulent transfer.  In that case he would go after the recipient of the property which could be a problem if it is a relative or friend of the debtor.  (See here for more on fraudulent transfer).

Other reasons for adversary proceedings would be when a creditor believes a bankruptcy was filed in bad faith.  A debtor can also file an adversary proceeding against a creditor for violations of the bankruptcy automatic stay when a creditor attempts to collect a debt which he cannot because of the bankruptcy.  There are adversary proceedings filed by the debtor’s attorney to strip off second mortgages.

There are numerous reasons for adversary but contact a bankruptcy attorney right away if you get one filed against you.  There are distinct timelines to respond to one of these and definite procedures for doing so.

I am bankruptcy attorney in San Diego who handles adversary proceedings for both settlement and trial.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com for more info. about any of these topics.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis!

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.