There is actually no Chapter 20 in the bankruptcy code, the Chapter 20 is the term used when someone files for a Chapter 13 bankruptcy just after getting a Chapter 7 discharge. This is done when the person filing bankruptcy, or his lawyer, feels either chapter is inadequate to provide relief to the filer.
First let’s see in a nutshell what each chapter provides.
Chapter 7 – This provides for a quick discharge of a bankruptcy filer’s debts, but also requires the filer to pay a lump sum to creditors to be able to keep secured property like a home or a vehicle, roughly equivalent to the item’s replacement value or reaffirm the debt and go on making payments as if a bankruptcy never occurred.
Dischargeable debts include credit card debt, mortgages, medical bills, vehicle loans, personal loans and even tax debts.
Chapter 13 – This allows a filer to pay a non-dischargeable debt or settle a delinquent mortgage or car loan by way of a payment plan that usually lasts several years.
Why people file for a Chapter 20
A Chapter 20 strategy allows consumers to be eligible for Chapter 13 relief if they cannot file for Chapter 13 directly because they do not fulfill some of the requirements.
Pros of a Chapter 20 strategy
It buys time. The most common reason for filing Chapter 20 is when people need more time to settle a delinquent mortgage or car loan. If your overall debt exceeds the limits specified under Chapter 13, you can file for Chapter 7 first, so when you subsequently file for Chapter 13, you will get more time to settle the debts or to pay non-dischargeable debts under Chapter 7.
A Chapter 20 filing can also protect your home while allowing you to pay off debts, specifically when people have a second or even third mortgage on their home. When a homeowner owes more on the first mortgage than the home is actually worth, Chapter 13 will let the second mortgage be removed to become an unsecured debt.
Cons of a Chapter 20 strategy
You have to be careful in proceeding with a Chapter 20 bankruptcy. Under law you cannot file for a Chapter 13 discharge four years after you have filed for a Chapter 20.
Some jurisdictions and judges also do not favor granting this type of bankruptcy, seeing it as a loophole already overexploited by opportunists; others cite the possible lack of good faith on the part of the debtor when it comes to this move.
Another known disadvantage to going for a Chapter 20 is that some states require the petitioner to first pass a Means Test. For example the in Colorado Bankruptcy Court the household size, income and expenses of the family of the filer has for to be examined six months before filing. So this has to have ample preparation. A debtor who does not pass the Means Test will be required to file chapter 13 directly, if eligible.
The strategy itself can also be used against a filer if a secured creditor can prove that the multiple filings were intended to hinder, delay or defraud them.