When you file for Chapter 13 immediately after receiving a Chapter 7 discharge, it is known as a Chapter 20 situation. Its intended purpose is to allow you to discharge your unsecured debts via a Chapter 7 and then catch up on nondischargeable debts such as taxes and your mortgage in a Chapter 13 repayment plan.
Benefits of using a Chapter 20 bankruptcy filing to reorganize and discharge or repay your debts include:
- You can focus on secured and priority debts: Most people file for Chapter 13 to pay off nondischargeable debts such as back taxes or catch up on missed mortgage and car payments. However, Chapter 13 requires you to also address unsecured debts, such as credit card bills or medical debt, so if these are eliminated first in a Chapter 7, you can focus on these priority and secured debts in a Chapter 13.
- You may now qualify for Chapter 13: You can’t file for Chapter 13 if you carry more than a certain amount of unsecured or secured debt. While Chapter 11 is an option, it is comparatively difficult and expensive to file. With Chapter 20, you can eliminate enough unsecured debt in the Chapter 7 stage of the process to meet the Chapter 13 threshold.
Like all bankruptcy chapters, Chapter 20 also has its drawbacks. They include:
- You may not be discharged from Chapter 13: Once you have been discharged from a Chapter 7, you may not receive a discharge in your Chapter 13 unless at least four years have passed between your Chapter 7 and 13 filings. This can be a problem in some jurisdictions if you’re trying to strip a second mortgage in a Chapter 13.
- No lien stripping: If the balance of your first mortgage exceeds the value of your home, then leaving subsequent mortgages unsecured, you can generally get rid of it (strip the lien) in a Chapter 13. Bankruptcy courts at present tend to be divided on whether or not you can strip a lien in a Chapter 20. Some allow it, while others take the position that you need to be eligible for a Chapter 13 discharge before you can strip a junior lien from your home.
Chapter 20 also inspires more than its fair share of bad faith objections. This means that the court or your trustee take the position that you filed only to avoid repaying unsecured creditors in your Chapter 13. If this happens, then you will have to prove that your reason for filing Chapter 20 had nothing to do with dodging unsecured creditors.
If you are experiencing serious financial problems and want to know whether Chapter 20 could give you the fresh start you need, then contact a New York bankruptcy attorney. An attorney can advise you on your best course of action and help you take the first step toward being financially free once again.