Is There Really a “Chapter 20” Bankruptcy? How Can it Help Me, Especially After the Big Change in the Law?

November 30, 2009 by Oliveros & O'Brien, P.C.

There is no “Chapter 20” bankruptcy option, at least not in the same sense that a person can file a Chapter 7 case or a Chapter 13 one. Instead “Chapter 20” is a shorthand way of talking about filing a Chapter 13 case after having filed an earlier Chapter 7 one. (13 + 7 = 20.) This option has been significantly limited after major amendments to the bankruptcy laws in 2005, but “Chapter 20” can still provide critical help in certain special situations.

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As most people know, there are limitations on how often you can file bankruptcy. But the details of the rules create some important opportunities. Here are just a couple of these details:

 

Rule #1. If you filed a Chapter 7 case and received a discharge of your debts—which happens in the vast majority of Chapter 7s—then under current law you would not be able to file a Chapter 13 case, AND receive a discharge of your debts in that case, unless at least four years had passed since the filing of that prior Chapter 7 case.

Example: Let’s say you got a divorce in early 2006, and to deal with its financial fallout you filed a Chapter 7 case on December 1, 2006, and got a discharge of your debts a few months later. Since then you had medical problems that were only partly covered by insurance. You were afraid of getting sued by the aggressive medical collection companies, and then having your wages garnished and as a result losing your job. So after a lot of struggle, you paid off most of those medical debts but did so only by not paying a few mortgage payments and also falling behind on child support payments. Now you’ve gotten a notice from your mortgage company about a foreclosure, and your ex-spouse is making noises about garnishing your wages to get the child support payments caught up. You’re back in decent health and are working steady with enough income to pay living expenses and the regular mortgage and support payments, but no way can you make enough money to catch up on the thousands of dollars you’re behind on your mortgage and support. You’ve heard that a Chapter 13 may be able to help with some of these current problems. Can it?

Because of the 4-year rule, you cannot file a Chapter 13 case AND get a discharge of any remaining medical debt or any other debt unless you wait to file that new case until December of 2010.

 

Rule #2: Even though you cannot file that new Chapter 13 case AND get a discharge of your new debts, you ARE permitted to file a Chapter 13 case before that four years have passed and get the other advantages of a Chapter 13 case.

Example: Under the same example, filing a Chapter 13 case BEFORE the four years has passed probably makes very good sense. In circumstances such as these, getting a discharge of debts is not as important as other aspects of Chapter 13 law.  So that:

  • The mortgage holder, who could well otherwise refuse to take any payments from you unless you had the whole arrearage amount, in a Chapter 13 case would likely be required to accept relatively small payments stretched out over a number of years until you were caught up.
  • The child support arrearage could also be paid in small increments over the course of years, and your ex-wife or the support enforcement authorities could not garnish your wages, grab tax refunds, or threaten to take away your driver’s license or professional licenses to make you cure the arrearage any faster, as long as you kept up your normal monthly support payments and your Chapter 13 obligations.
  • In most cases your other debts, such as any of the remaining unpaid medical ones, would be stopped from collecting on those debts during the years while your new Chapter 13 case is active. So you may not hear from these creditors for those years, or even afterwards. But you do have to remember that those debts are not being discharged (legally written off) in your Chapter 13 case, and likely additional interest and other fees are being added on during this time. However, after a number of years of no activity, those creditors may well be willing to settle on sensible terms.

Final example: You may need to file a Chapter 13 case to gain some of its many advantages, but you may not qualify because you have too much debt. Although Chapter 13’s maximum debt limitations ($1,010,650 of secured debt and $336,900 of unsecured debt) may be sufficiently high for most people, more and more people with business debts or severely undersecured homes find themselves over these limits. So if you had a $100,000 Small Business Administration loan, $75,000 in credit card and other unsecured debt, $25,000 in personal income tax debts, and owed $550,000 on a home that was now worth $400,000 (making $150,000 of that mortgage legally considered unsecured for Chapter 13 debt qualification purposes), that totals about $350,000 of unsecured debt, too much to qualify for Chapter 13. In this situation the best option may well be to file a Chapter 7 case to discharge all or most of the unsecured debt, and then, having now qualified to do so, to file Chapter 13 as soon as the Chapter 7 is completed. That Chapter 13 would help retain the home, and pay the income taxes without further interest and penalties, among other potential benefits. A discharge in the Chapter 13 case would either not be needed or would be relatively unimportant since most if not all the dischargeable debts would have been discharged in the earlier Chapter 7 case.

 

Conclusion

Figuring out the right game plan for your unique situation, especially one dealing with complicated tactics such as a “Chapter 20,” not only requires the advice of a bankruptcy attorney, but the advice of a highly experienced and attentive one. Michael O’Brien is just one of three attorneys in all of Oregon who is Board Certified as a Consumer Bankruptcy Specialist by the American Board of Certification. Call Mike personally, or set up a free consultation to discuss your situation. You can reach him by calling 503-786-3800, or by clicking here to send him an email.