Bankruptcy is a legal process in which an eligible individual is permitted to reduce or eliminate their dischargeable debts. There are many different types of bankruptcy such as consumer bankruptcy and business bankruptcy.
Consumer bankruptcy is for an individual who cannot meet their financial obligations due to debt they incurred for personal needs. There are two main types of consumer bankruptcy, Chapter 7 and Chapter 13.
A business bankruptcy is for a business or an individual who is their business to obtain relief from their debts. There are two main types of business bankruptcy, Chapter 7 and Chapter 11.
If the individual is a small business, they would file a Chapter 7 bankruptcy. If the business is a separate legal entity, including LLCs, they would file a Chapter 11 bankruptcy.
What are the Different Types of Bankruptcy?
There are numerous different types of bankruptcy for which debtors may qualify. Most bankruptcies are filed under the three main chapters of the Bankruptcy Code. Most of the individual consumer bankruptcy filings are filed under Chapter 7. The most common types of bankruptcy are:
The three less common types of bankruptcy are:
- Chapter 9;
- Chapter 12; and
- Chapter 15.
Only a federal court is permitted to hear a bankruptcy case. A bankruptcy case cannot be filed in a state court.
What is Chapter 20 Bankruptcy?
Technically, there is no such thing as a Chapter 20 bankruptcy. This is because the Bankruptcy Code only goes to Chapter 15.
A Chapter 20 bankruptcy refers to a debtor who files for a Chapter 7 bankruptcy and then files for a Chapter 13 bankruptcy following the completion of the Chapter 7 bankruptcy. The name “Chapter 20 bankruptcy” comes from the combination of Chapter 7 plus Chapter 13 equals Chapter 20.
Why Would I Want to File for Chapter 20 Bankruptcy?
There are two main reasons an individual may wish to file for a Chapter 13 bankruptcy following a Chapter 7 bankruptcy. First, the two types of bankruptcies provide benefits if filed sequentially.
Individuals typically file for a Chapter 7 bankruptcy in order to discharge their unsecured debts, such as credit cards. Individuals typically file for a Chapter 13 bankruptcy to lien strip, or to reduce the amount of money they owe to secured creditors, such as car loans.
The advantages of these two types of bankruptcy overlap very nicely. Most individuals have both secured and unsecured debt. One of the goals of a Chapter 20 bankruptcy is to discharge unsecured debts in the Chapter 7 bankruptcy and then reduce the remaining secured debt in the Chapter 13 bankruptcy. By utilizing Chapter 20 bankruptcy, the individual can make the most of the bankruptcy system.
Another reason to file for a Chapter 20 bankruptcy is to extend the amount of time the individual has to repay secured loans. During a bankruptcy, the court issues an automatic stay which prohibits creditors from trying to collect on debts owed.
In a Chapter 7 bankruptcy, the automatic stay only lasts a few months because the duration of the bankruptcy proceedings typically only take a few months. In a Chapter 13 bankruptcy, however, the stay could potentially last three to five years, depending on the payment plan.
If an individual needs extra time to cure an arrearage on a mortgage or car loan but their debt exceeds the Chapter 13 limits, filing for a Chapter 7 bankruptcy first may reduce their overall debt. Then, once their overall debt is reduced, although they will not be able to obtain a second discharge in a Chapter 13, they will get extra time to cure the arrearage or pay down a debt that was not eligible for discharge in the Chapter 7.
Filing the Chapter 7 bankruptcy first may allow an individual to have more income to take advantage of reducing the length of their Chapter 13 repayment period, curing a higher arrearage amount, or paying larger tax debts in the repayment plan. The Chapter 13 may also allow the individual the ability to completely lien strip an unsecured second mortgage. This is not always permitted, so it is important to consult with an attorney.
What are Some Pros and Cons of Filing for Chapter 7 Bankruptcy Only?
A Chapter 7 bankruptcy has pros and cons. If an individual does not have non-exempt assets that they want to keep, benefits may include:
- Receiving a quick discharge of debts;
- Discharging unsecured debts without typing up their income for 3 to 5 years; and
- There are no debt limits.
There are, however, also cons to filing a Chapter 7, including:
- The inability to force a creditor to permit an individual to cure a mortgage or car loan arrearage over time;
- The inability to force a creditor to give an individual extra time to pay on a non-dischargeable debt; and
- You cannot lien strip an unsecured second mortgage.
What are Some Pros and Cons of Filing for Chapter 13 Bankruptcy Only?
A Chapter 13 bankruptcy provides benefits, including:
- Forcing creditors to permit an individual to cure a mortgage or a car loan arrearage over time;
- Forcing creditors to give an individual extra time to pay off non-dischargeable debts; and
- The ability to lien strip an unsecured second mortgage.
There are also cons to a Chapter 13 bankruptcy, including:
- An individual does not receive a quick discharge;
- The individual commits to a repayment plan for 3 to 5 years; and
- An individual is not eligible if they exceed the debt limits.
Is There a Rule Prohibiting Multiple Bankruptcies?
Yes, a rule does exist in the Bankruptcy Code regarding multiple bankruptcies. The rule, however, prohibits the discharge of debts in multiple bankruptcy filings within a four year period. Typically, this would be fatal to a bankruptcy case because the individual’s goal in filing the bankruptcy is to discharge their debt.
However, the rule regarding multiple bankruptcies does not apply if the individual is not seeking discharge of their debts. If the individual seeks to reduce the amount of their debt owed in a Chapter 13 bankruptcy instead of discharging their debt, there is not prohibition on filing for Chapter 13 bankruptcy after filing for a Chapter 7 bankruptcy.
Does Chapter 20 Abuse the System?
The answer to that question depends on the jurisdiction and the bankruptcy judge. A chapter 13 bankruptcy is a repayment plan. In a Chapter 13, the individual must propose a plan to pay back their creditors. One of the requirements of the repayment plan repayment plan is that the individual must propose the plan in good faith.
Some judges and jurisdictions believe that a Chapter 20 bankruptcy abuses the code and bankruptcy system and is thus in bad faith. Other judges and jurisdictions have no issues with a Chapter 20 bankruptcy and will confirm the repayment plan in a Chapter 13 bankruptcy regardless of a previous Chapter 7 filing.
Do I Need a Lawyer for a Chapter 20 Bankruptcy?
It is essential to have the assistance of an experienced bankruptcy lawyer for any bankruptcy issues you may have. Although a Chapter 20 bankruptcy permits you to make the most of the bankruptcy system, it may be extremely challenging to properly execute. Not every court will permit a Chapter 20 filing. In addition, not every individual’s situation warrants multiple bankruptcies.
Your attorney can review your situation, determine if a Chapter 20 may be right for you, and advise you whether or not it is permitted in your jurisdiction. A bankruptcy lawyer can be the difference between a case dismissal and a successful Chapter 20 bankruptcy filing.