As an Asheville bankruptcy law specialist I occasionally file chapter 20 bankruptcy cases. You might ask, “What is a chapter 20 bankruptcy case?” In fact, if you’ve read my last blog post about the various bankruptcy chapters you will reasonable say, “There’s no such chapter in the bankruptcy code!” You’re right. There’s no such thing as chapter 20 in the bankruptcy code. But, that doesn’t mean I don’t file chapter 20 cases.
Actually, a “chapter 20 bankruptcy” is a case in which someone files a chapter 7 case followed by a chapter 13 case. Bankruptcy attorneys call this “chapter 20” for the simple reason that 7 plus 13 equals 20, hence chapter “20.”
The real question is why someone would want to file back to back bankruptcy cases. There are some good reasons for doing so. First of all, most people who file chapter 20 cases owe lots of unsecured debt that they cannot play, plus tax debt. The idea behind a chapter 20 is that the individual’s unsecured debts (such as credit cards, personal loans, and medical bills) will be discharged in the chapter 7 case, leaving the tax debts. (Most tax debts cannot be discharged.) If the person is unable to enter into a voluntary repayment plan with the IRS or the NC Department of Revenue to repay these debts under their guidelines the person can then file a chapter 13 bankruptcy to resolve those debts. Because a chapter 13 bankruptcy is a repayment plan, they can simply repay their tax debts in full over 5 years (the maximum time allowed in chapter 13). They don’t get a discharge in the chapter 13 case; however, they don’t need one. They just need a repayment plan to repay their taxes.
Another reason people file chapter 20 is to save a home that is in foreclosure. This can be done in a chapter 13, without resort to filing chapter 7. However, for a few people the chapter 13 plan payment may be too high due to all of the person’s non-mortgage debt. Filing the chapter 7 case first will discharge the debts, leaving the mortgage. The person can then file chapter 13 to get caught up on their past due mortgage payments (called the “arrearage”) and save their homes from foreclosure.
I represent people who owe non-mortgage debts secured by vehicles and mobile homes. Often, the amounts owed are significantly more than the value of the collateral securing the debts. For instance, I often see clients who owe $25,000 on vehicles worth $10,000 (or less!) In these situations, my client can file chapter 7 to discharge the underlying debt. The only thing remaining after chapter 7 is the lien. My clients will then file a chapter 13 case to repay the lien. Here’s why: chapter 13 allows you to pay the value of the lien, rather than the amount of the loan. So, if the loan has been discharged in chapter 7 then my client can file chapter 13 and only have to repay the value of the collateral. In other words, if my client owes $25,000 on a vehicle worth $10,000, she can file chapter 7 to discharge the $25,000 debt then file chapter 13 and only have to repay $10,000 (the value of the car) in the chapter 13. This scenario isn’t always the best idea, but occasionally it allows people to retain their vehicles or mobile homes on which they owe large amounts of money.
Bankruptcy attorney and specialist Rod Kight has represented clients in over 2000 bankruptcy cases. Contact us for a consultation to see if bankruptcy is right for you.