It 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 email@example.com.
Twenty photo courtesy of takomabibelot.