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.

When do I need a chapter 13 bankruptcy instead of a chapter 7?

Chapter 13 bankruptcies and chapter 7s are very different bankruptcies bur both have advantages and disadvantages.  A chapter 7 is good because it is clean and fast.  It discharges debts quickly.  It is all over in 90 days and you can then go on with your life if you qualify for the chapter 7.  Not everyone does qualify though.

Some people are “means tested” out of a chapter 7 because they make too much money to file one.  They have disposable income and thus bankruptcy law says that they must therefore file a chapter 13 bankruptcy if they want to file one at all.  (They would also qualify for a chapter 11 but that is another story).

Others don’t qualify if there is too much equity in their home.  In a chapter 13 they could then keep the home and continue to make payments on it in the 13.  One must always be careful that you do not violate the “best interests of creditors test”.  This is where the creditors have the right to demand that they get as much in a chapter 13 as they would in a chapter 7 liquidation.

The 13 differs from the 7 in that it is a payback plan where the debtor makes payments to the trustee for from 3 to 5 years.  In this period the debtor pays back some or all of his debts.  Most plans pay only a percentage of the debts but some do pay back 100%.  After the payback period is over then the unpaid debts (if there are any) will be discharged.

But why pay back the debts if you can discharge and escape them?  There are many reasons and one is the income limits of a 7 discussed above.  If you exceed these income limits then you cannot file a 7.  Debtors also file chapter 13s to take advantage of the lien strip and the cramdown.  See here for a blog on what is a cramdown?

The cramdown allows you to write down loans to the value of the property and is useful if you have property that is underwater.  The lien strip allows you to strip off or eliminate a second mortgage on a home if it is completely unsecured.  So if you have a home that is worth less than the first mortgage then the entire second mortgage can be eliminated after the 5 year payment plan is over.

Both of these cannot be done in a chapter 7 and if you want a cramdown or a lien strip then the chapter 13 is your chapter.  If your income is too high then a chapter 13 also makes sense.  There is one more advantage though to a chapter 13.  It can be dismissed by the debtor at any time.  Once you file one you are not locked in like you are with a chapter 7.

The disadvantage though is that you are locked into paying a trustee for a period of five years if you want to complete the plan and get a discharge.  Most chapter 13 fail because people can’t make these regular payments for five years to a trustee.  According to one article I read as many as 92% of them fail and are dismissed or converted to a chapter 7.  This is a very high fail rate and this is the reason why most people file chapter 7s.

You can pay a chapter 13 bankrupty off early though if you have the money.  So if you payments are $300 per month and you are three years in you could pay off the remaining two years early and get out of the 13.  Most people though don’t have the money to do this.

You should consult a bankruptcy attorney to see which chapter is right for you.

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.

Pilot program-In Rhode Island bankruptcy judges could be allowed to modify mortgages in bankruptcy court.

According to Fox business there is a pilot program in Rhode Island that will allow judges to write down mortgages in bankruptcy presumably for to the current value of the home.  Senator Whitehouse of Rhode Island has been active in the mortgage and foreclosure crisis for some time and he is apparently asking for this to be passed in the lame duck session of Congress.

Mortgage reductions in bankruptcy court have been asked for some time but the have never been passed.  Bankruptcy judges currently can “strip” a second mortgage in chapter 13 bankruptcies if they are totally unsecured but first mortgages can not be written down to the value of the home as of yet.  Many say that this should not happen as it is unfair to some and because it would put a great burden on the banks.

I can find no confirmation of this other than Fox Business but apparently there is a pilot program active in Rhode Island to write down these first mortgages.  This would mean a huge reduction in both the principal and the mortgage payment for many people.  If this was to be put in place nationally it would solve the foreclosure crisis.  If people could write down their loans to the value of their houses many people could probably stay in them.

I know it would help many of my clients tremendously.  Most people who are in foreclosure are upside down in their mortgages meaning that the homes are worth far less than what they owe on them.  If we could correct this imbalance then it would allow a large number of homeowners to stay on their homes.

It seems that with the continuing mortgage crisis and the robo-signing bank scandals the idea of allowing mortgage write downs is becoming more popular.  In addition foreclosures are rising rapidly.  According to Fox (as reported by Realtytrac) foreclosures are up 76% in Seattle, 35% in Chicago, 26% in Houston and 23% in Detroit.

With all of these foreclosures there is increasing political pressure to do something to call a halt to it.  A foreclosure moratorium has been called for but a mortgage write down in a bankruptcy would be a better and more permanent solution.  I believe that the banks are now in public disfavor and they can do less and less top stop this from happening.

If you need any help with your bankruptcy or foreclosure please visit my website at www.farquharlaw.com.  I am a bankruptcy attorney practicing bankruptcy law in San Diego.

Chapter 7 or Chapter 13- Which Bankruptcy Chapter Do I Need?

Clients are often confused about chapter 7 and chapter 13  bankruptcies.  (There is also a chapter 12 for farmers and chapter 11 for businesses).   A chapter 7 is the one where you get a discharge of your debts 90 days after you file.  The 7 has a very short timeline and clients like it because of the simplicity and speed at which it is processed.  The debtor (the person who files bankruptcy) attends the 341 hearing (meeting of creditors) 30 days after he or she files bankruptcy.  The creditors rarely show up at the 341 hearing so it’s just you, the attorney, and the Trustee who are in attendance.  The bankruptcy discharge is then usually granted another 60 days later.

The debtor must list all of their assets and debts in their bankruptcy schedules when they file.  The debtor must list their secured creditors separately from the unsecured creditors and the debtor must list whether they intend to keep their secured assets or surrender them.  The debtor must also list their income, expenses, all of their personal property, a statement of financial affairs, and do the means test.  There are also a few other schedules that must be completed but these are the main ones.  (Check my previous blog for an explanation of the means test).  When the schedules are completed then this information is filed with the Bankruptcy Court.

The 7 is most popular but there is also a chapter 13 where you pay back all or part of your debts over a period of 3 to 5 years.  This chapter is useful when you make too much money for a Chapter 7, or if you need to protect assets from trustee, or if you need to make up back mortgage payments and pay them out over the next 3 to 5 years.

Also you can strip off a second mortgage in a chapter 13 if it is totally unsecured.  A totally unsecured second mortgage is one where the value of the house is less than the value of the first mortgage leaving the second with no equity to attach to.  Stripping it off means that you get rid of it, you don’t pay it, and it goes away.

“Cramdown” is also useful in a 13 where you reduce the value of the loan on an asset in the bankruptcy to the value of the asset.  So if you have a car worth $10,000 but the loan value (the amount you owe) is $20,000, you would only have to pay back the $10,000 (over 3 to 5 years) to keep the car in the bankruptcy as the loan would be “crammed down” to $10,000.  The remaining $10,000 on the loan would go away and the finance company would never be able to collect it from you.  You must continue your payments for the full 3 to 5 years to get your discharge at the end of the chapter 13.  This is hard for many people and they sometimes drop out of these plans and then their debt returns.

So a 7 with the possibility of getting rid of all your credit card, medical, personal loan debt in 90 days is still the most popular form of bankruptcy by far and most people choose this one.  13s are rarer but available and advisable under the right circumstances.