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.
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 plus 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 §722 that made it clear that redemption by installments is not allowed.
To redeem property using a Chapter 20 procedure, you would have had to be making regular payments on the debt—no arrearages. You would have to continue paying the debt without either redeeming the property or signing a reaffirmation agreement. After receiving your Chapter 7 discharge, you would then file a Chapter 13 case, and would then be able to redeem your property in installments.
A debtor who wants to file under Chapter 13 must have noncontingent, liquidated, unsecured debts of less than $336,900 and noncontingent, liquidated secured debts of less than $1,010,650 as of April 1, 2007. These amounts are adjusted for inflation every 3 years. (Noncontingent simply means that the debt does not depend on a future event and liquidated means that the debt is fixed in value. )
While it would seem unlikely that most debtors would have unsecured debt greater than $336,900, it could be a good possibility if the debtor owns real estate in a high-priced market and took out 1 or more home equity loans. Because real estate prices have been falling over the past year or so, many properties are oversecured. In other words, the property is not worth as much as all of the debt secured by it. Therefore, those loan amounts that are over the value of the property are unsecured.
For instance, suppose that you had bought a house for $1,200,000 at the peak of the real estate bubble, and have a primary mortgage of $1,000,000 and a home equity loan of $400,000 secured by the property. If the house is now only worth $1,000,000, then the junior lien is totally unsecured, and, thus, you would not be able to file for Chapter 13. It may be possible to strip off the lien in a Chapter 7, but only a few courts have allowed this. Consult a bankruptcy attorney to learn all of your options.
Chapter 7 can eliminate most or all of the unsecured debt on property, which can qualify the debtor to file under Chapter 13.
Besides being able to redeem secured property in installments for their replacement value, the other advantage of Chapter 13 is that there are several debts that are dischargeable under Chapter 13, but not under Chapter 7:
There are several disadvantages to a Chapter 20. First, it will take longer to get your fresh start, especially since you cannot obtain a Chapter 13 discharge in less than 4 years after filing for Chapter 7. However, this is not too much of a disadvantage, since it takes 4 to 6 months to receive a chapter 7 discharge from its initial filing and a minimum of 3 years for a chapter 13 bankruptcy.
You will also have to pay fees for both filings.
Ironically, what is not a disadvantage is that the 2 bankruptcy filings will not be on your credit report longer than just a Chapter 7 filing, because a Chapter 7 filing can be listed on credit reports for 10 years from the filing date whereas a Chapter 13 can only be listed for 7 years from its commencement. This means that by the time the Chapter 7 filing is delisted from your credit report, the Chapter 13 bankruptcy will have already been expunged from your report.
The BAPCPA has made it more difficult to successfully complete a chapter 20. First, the BAPCPA introduced a means test to determine whether a debtor can file for Chapter 7. If the debtor's income is too high, then he will be forced to file for Chapter 13. The BAPCPA also introduced §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.
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:
Source: http://www.rib.uscourts.gov/D/1998/Keachcnf.PDF