Chapter 20 Bankruptcy

Posted by Kevin on August 22, 2011 under Bankruptcy Blog | Be the First to Comment

Bankruptcy has its own language- sometimes quite colorful.  We have cram downs and strip offs.  Long before we talked about mortgages being underwater, underwater was a term used frequently in bankruptcy to determine whether a claim was secured or not.

Another colorful term is Chapter 20.  Now, most consumers file under Chapter 7.  If your income is too high or you want to save a home, you may file under Chapter 13.  But what is a Chapter 20?  Well, it’s a Chapter 7 followed by a Chapter 13.

Why would you do it?  Well, let’s say that you want to keep your house but you have too much unsecured debt to qualify for a Chapter 13.  If you file a Chapter 7 first, then your unsecured debts are discharged.  When you then file a Chapter 13, you only have your mortgage to pay together with the Chapter 13 commission.

Many trustees argue that a Chapter 20 is, on its face, a bad faith filing.  But the Supreme Court said that you can do it subject to court review, on a case by case basis, of whether it is bad faith.

In a later post, we will look into stripping off a completely underwater 2d mortgage in a Chapter 20 scenario.