Chapter 20 Bankruptcy
There are some situations where it is advantageous to file for Chapter 7 bankruptcy, then immediately after receiving a discharge to file for Chapter 13, in what is called a chapter 20 bankruptcy. Some courts have even allowed a debtor to file a Chapter 13 case while his Chapter 7 case was still pending. However, most courts have required that the Chapter 7 case be closed first because of the difficulties of having 2 concurrent cases dealing with the same debts.
Redemption by Installments
In a Chapter 7 bankruptcy, there are only 2 ways to keep secured property: redeeming the property by paying the creditor a lump sum equal to its replacement value or by signing a Reaffirmation Agreement where the debtor would have to continue paying on the full amount of the loan as if the bankruptcy never happened.
The advantage of redemption over reaffirmation is that the debtor can just pay the replacement value of the secured property rather than paying the full amount of the loan as would occur in reaffirmation. For instance, if you owe $10,000 on a car that is only worth $6,000, then you would only have to pay $6,000 to redeem it, but you would have to pay the full $10,000 + interest in a reaffirmation agreement. Obviously, it would be advantageous to be able to redeem the car by paying only $6,000, but the problem is that you would have to pay the full amount in a lump sum, which isn't likely if you are filing for Chapter 7. Furthermore, if you purchased the car within 910 days of filing for Chapter 7, then the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 prevents you from redeeming the car by paying only its replacement value. You must continue making payments on the full debt to keep the car.
Previous to the BAPCPA, it was possible to pay in installments if the creditor agreed. However, the BAPCPA added some language to §362(d)(4)(B) that allows a secured creditor of real property to be granted relief from the automatic stay if the creditor can show that the debtor's serial filings was a means of delaying, hindering, or defrauding the creditor.
Another factor that may prevent you from successfully prosecuting a Chapter 20 maneuver is the lack of good faith. If the court or the trustee believes that you are using bankruptcy to defraud your creditors, then you may not receive a discharge.
Factors that Courts Consider in Whether There is Good Faith in a Chapter 20 Serial Filing
Since good faith can only be determined by the totality of circumstances, the courts have developed a non-exclusive list of factors to consider for a Chapter 20:
- Debtor
- Did the debtor intend to file a Chapter 20?
- Is the debtor honest?
- Do the number and timing of previous bankruptcy filings suggest dishonesty or an abuse of the system?
- Is the debtor facing unusual or exceptional problems that can be mitigated with a Chapter 20 filing?
- Is the Chapter 13 filing the result of changed circumstances?
- Chapter 13 Repayment Plan
- Are the proposed repayments only a small percentage of the claims?
- Will the debtor be able to execute a Chapter 13 repayment plan?
- Claims
- The type and amount of unsecured claims.
- Did the claims arise out of wrongful conduct in which the debtor proposes only minimal repayment?
- Does the chapter 13 repayment plan represent a good faith effort to satisfy creditors' claims?
- Legal Purpose
- Does the net result of the chapter 20 filing lead to results that are impermissible in Chapter 7 or Chapter 13?
- Do the 2 filings abuse the bankruptcy system or frustrate the purpose of the Bankruptcy Code?