By Ryan C. Wood
Every so often I get asked about what the possibilities of are of filing a Chapter 20 bankruptcy. Chapter 20‘s are not usually asked for by name given that not too many people know what a Chapter 20 bankruptcy is. A Chapter 20 bankruptcy is when you have essentially filed a Chapter 7 bankruptcy and then subsequently file a Chapter 13 bankruptcy (7 + 13 = 20). Normally you have to wait 4 years after filing a Chapter 7 bankruptcy before you can file a Chapter 13 bankruptcy case and be eligible to receive a discharge of your debts.
What are the situations where you would need to file a Chapter 20 bankruptcy?
Wouldn’t it be simpler and cheaper to just file a Chapter 13 the first time around? Yes, most of the time it would be simpler if you had just filed a Chapter 13 so there are not as many issues. However, that is sometimes not possible due to the circumstances. People sometimes file for a Chapter 7 first to discharge of all their unsecured debts before filing a Chapter 13 because they may be over the debt limitations under 11 U.S.C. §109(e). You are not eligible to be a debtor under Chapter 13 is your unsecured, liquidated, noncontingent debts exceed $383,175, or secured, liquidated, noncontingent debts exceed $1,149,525. Another scenario may be they file for a Chapter 7 to discharge their unsecured debt but later find themselves with mortgage arrears and are facing foreclosure so they need to file a Chapter 13 bankruptcy case to save their home. If you are considering a Chapter 20 bankruptcy you should consult with an experienced bankruptcy attorney to help you with the case as it may be fairly complicated.
Chapter 20 and Lien Stripping
One of the biggest questions currently is whether you can strip your junior mortgage in your Chapter 13 bankruptcy case if you have already received a discharge of your debt in your previous Chapter 7 case. Since you have already received a discharge of your debts in your Chapter 7 case you will not be receiving a discharge of your debts in the Chapter 13 case. Sometimes a discharge is not necessary though. For example, if you are filing a Chapter 13 case to pay back arrears in the plan there is no need for a discharge. There are some creditors that will argue that you cannot get a lien strip in your current Chapter 13 case if you will not receive a discharge. Fortunately, the Ninth Circuit holds that a lien strip in your current Chapter 13 case is possible so long as you successfully complete your Chapter 13 plan. This means your bankruptcy lawyer can help you strip your underwater junior mortgages, but you have to make sure you make all the Chapter 13 plan payments in order for the lien to be stripped.
Another issue in filing a Chapter 20 bankruptcy case is good faith. You cannot file a Chapter 20 case simply to do a lien strip. There are many factors to determine good faith: 1) whether the debtor misrepresented facts in the petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed the Chapter 13 petition or plan in an inequitable manner; 2) the debtor’s history of filings and dismissals; 3) whether the debtor only intended to defeat state court litigation; and 4) whether egregious behavior is present. In re Leavitt, 171 F.3d 1219 (9th Circuit 1999). The courts will look at the totality of the circumstances to determine whether the case was filed in good faith.