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What is Chapter 20 Bankruptcy?

There is no “chapter 20” bankruptcy. It is sort of a joke that lawyers tell. But it is a useful joke as it refers to a certain situation in which a debtor who owes too much money is allowed to use Chapter 13 bankruptcy protections.

Before we discuss why this is useful, we need to take a look at Chapter 7 and Chapter 13 bankruptcy as Chapter 20 bankruptcy only refers to a Chapter 13 bankruptcy that is filed directly after a Chapter 7.

Chapter 7 bankruptcy has no debt limits. Instead, there are income limits. If you make more than the state median, you may not be able to file for Chapter 7. Chapter 13, on the other hand, has debt limits but no income limits. So, what happens if you owe too much money to file for Chapter 13 but would benefit from some of the protections afforded by Chapter 13? In those cases, you have only two options. The first is to file a Chapter 11 like a business (which is usually quite expensive). The second is to try to file a Chapter 20 bankruptcy which is a Chapter 7 bankruptcy immediately followed by a Chapter 13. The Chapter 7 allows you to get your debt limit under the caps imposed by Chapter 13 allowing you to proceed with the Chapter 13.

When is This Helpful?

Let’s say your overall debts are $500,000. Some of these debts are incurred from credit cards or personal loans, but other debts are mortgage, car, or HELOC. You owe too much money to apply for protections under Chapter 13, but a lot of that debt is actually credit cards and other unsecured debts. In Chapter 7, you can apply to discharge the unsecured debt and then file for a Chapter 13.

In Chapter 13 bankruptcy, you can strip away some of the unsecured debt, but not usually all of it. If you have already filed a Chapter 7, you would hopefully not have any unsecured debt left over. This leaves you with debts only on your mortgage, car, and other unsecured debts. While you can never get concurrent discharges, you can force creditors to give you more time to repay the debt or force them to allow you to repay the arrearage on a schedule. The creditor may or may not want to offer this option to you. Chapter 13 gives you a way to get the court to force the creditor to take the payments. This way, you can keep your car, house, and other secured property. Further, once your unsecured debts are stripped, you will have more money to repay your secured creditors. 

Lastly, Chapter 13 offers the option of stripping HELOC liens from your home if the loan is completely underwater. This can be a huge benefit to those who have taken out second mortgages that they cannot afford to repay. 

Talk to an Indiana Bankruptcy Attorney Today

Christopher L. Arrington provides consumer bankruptcy representation to those struggling with significant debt. Call today to schedule a free consultation and we can begin discussing your options immediately.

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