What is Chapter 20 Bankruptcy?

November 1, 2011

By: David M. Serafin

The Bankruptcy Code makes no official reference to chapter 20. Instead, this is a informal term used to describe a situation whereby a debtor files a chapter 7 to discharge unsecured debts – such as from medical bills, credit cards, or any debt resulting from a previous foreclosure or repossession – and thereafter files chapter 13 to pay back debts (interest free and penalty free) for which liens survive the chapter 7 filing. (After filing for chapter 7, a debtor cannot seek a chapter 13 discharge for another four years and cannot file again for chapter 7 for another eight years.)

The most common example of a “chapter 20” filing occurs when a debtor neither eligible for nor seeking discharge intends to pay back taxes which cannot be eliminated in chapter 7 and/or to pay back past due mortgage arrears or past due HOA assessments to stave off foreclosure. The benefit is that the debtor in chapter 13 is allowed more time (three to five years) to pay back non-discharged debts and enjoins continued collection activity during this time.

A debtor with over $360,475 of unsecured debt is ineligible for chapter 13 (and would also be ineligible for chapter 7 if the Means Test is failed). But, a chapter 20 allows a debtor to discharge the overwhelming majority of unsecured debt – except for student loans, domestic support obligations, and some taxes – yet later pay back debt subject to liens and/or which cannot be eliminated. The vast majority of filers are nowhere near the unsecured debt limits but, given the weakened real estate market, the addition of a deficiency balance from foreclosure debt may put one over the unsecured debt limits. Even if the property has been retained, the portion of any oversecured mortgage balance is unsecured. For instance, for an underwater house valued at $300,000 with a $350,000 mortgage loan, the $50,000 difference is unsecured debt.

An undetermined issue is a whether a chapter 20 can be accomplished when the debtor exclusively attempts to strip off a second mortgage in a subsequent chapter 13 (if the property value is less than the first mortgage balance only as determined by a realtor valuation) under Section 506 of the Bankruptcy Code.

One disadvantage of chapter 20 is that the filer must first pass the Means Test in Colorado Bankruptcy Court – which examines income and expenses for six months before filing, and household size. A debtor who does not pass the Means Test will be required to file chapter 13 (if eligible) from the onset. Also, Section 362(d)(4) of the Bankruptcy Code allows a secured creditor to obtain relief from automatic stay if it can demonstrate that multiple filings intended to hinder, delay or defraud the creditor. Similarly, the court or trustee may consider the totality of the circumstances in determining whether multiple filings were made in good faith, especially if creditor’s claims go unsatisfied, there’s evidence of wrongful conduct, the chapter 20 filing leads to a result not obtainable in chapter 7 or 13 alone, and/or the filing frustrates the meaning of the Bankruptcy Code.

An experienced Lakewood consumer bankruptcy lawyer, David M. Serafin will help you consider all options for situations where both chapter 7 and 13 are appropriate.