Some debtors have financial problems that are not completely solved by either a Chapter 7 or Chapter 13 bankruptcy. In certain situations, filing a Chapter 13 bankruptcy immediately after completing a Chapter 7 bankruptcy, informally referred to as "Chapter 20," might provide more relief than filing a Chapter 7 or Chapter 13 alone.
This article discusses some of the pros and cons of filing Chapter 7 and Chapter 13 bankruptcy, how Chapter 20 bankruptcy works, and how a Chapter 20 can help in certain situations.
Pros and Cons of Only Filing for Chapter 7 Bankruptcy
Chapter 7 bankruptcy has its benefits and detriments.
If you qualify to file a Chapter 7 and don’t have non-exempt assets that you want to keep, the benefits are obvious. Under Chapter 7:
- you receive your discharge quickly,
- you discharge unsecured debts without tying up your income for the next three to five years, and
- there are no debt limits to qualify.
However, there are some things Chapter 7 bankruptcy cannot do. Under Chapter 7:
- you can’t force creditors to allow you to cure a mortgage or car loan arrearage over time
- you can’t force creditors to give you extra time to pay non-dischargeable debts, and
- you can’t strip unsecured second mortgages.
To learn more, see our Chapter 7 Bankruptcy area.
Pros and Cons of Only Filing for Chapter 13 Bankruptcy
Under a Chapter 13, you benefit because you can:
- force creditors to allow you to cure a mortgage or car loan arrearage over time
- force creditors to give you extra time to pay non-dischargeable debts, and
- strip unsecured second mortgages.
The detriments of a Chapter 13 are that:
- you do not receive your discharge quickly
- you commit to a plan that ties up your income for three to five years, and
- you are not eligible if you exceed the debt limits.
How a Chapter 20 Bankruptcy Works
Chapter 20 generally refers to a situation where a Chapter 13 is filed right after your Chapter 7 is completed. Some courts even allow the Chapter 13 to be filed after the Chapter 7 discharge is granted but before the case is closed. When you file a Chapter 13 after a Chapter 7 without waiting four years, you cannot receive a discharge in the Chapter 13 but there are other benefits that might fit your situation.
When Is a Chapter 20 Helpful?
You need the extra time but have too much debt. If you need the extra time to cure an arrearage on a mortgage or car loan but your overall debt exceeds the debt limits under Chapter 13, filing a Chapter 7 first might help. By filing the Chapter 7, you can reduce your overall debt. Then, with your debt load reduced, you may be able to qualify for Chapter 13. Although you won't be able to get a second discharge in the Chapter 13, the second bankruptcy filing will give you extra time to cure the arrearage on your mortgage or car loan or to pay down debts that were not eligible for discharge under the Chapter 7, such as tax debt.
You need to have more money available to apply to an arrearage or non-dischargeable debt. By filing a Chapter 7 first, you may be able to reduce your unsecured debt so that more of your income is available to pay the arrearage or non-dischargeable debt. This can allow you to:
- reduce the length of your Chapter 13 plan period
- cure a higher arrearage amount, or
- pay larger tax debts through the plan.
You want to utilize lien stripping. Some courts allow you to strip off completely unsecured second mortgages through Chapter 13 bankruptcy. The bankruptcy courts are not all in agreement on this so it would be best to check with an experienced bankruptcy lawyer in your area if this is your purpose for following a Chapter 7 with a Chapter 13. (To learn more see, What is Lien Stripping in Chapter 13 Bankruptcy?)