What chapter are we in, anyway?

Talk to a bankruptcy lawyer, and it won’t be long before he’ll start spouting off about “chapters,” as if he was the deranged leader of Oprah’s book club: “First you’ve got Chapter 7, then Chapter 13, and there’s always Chapter 11, and even chapters 9, or 12 and 15 . . . ”

Potential bankruptcy clients, on the other hand, are mostly befuddled by this jargon, even after they educate themselves a bit by visiting this site and others like it.

And when the lawyer starts talking about “Chapter 20” that’s when the real confusion starts!

Because, try as hard as you might, you won’t find any chapter 20 in the bankruptcy code.

“Chapter 20”, instead, is lawyer’s slang for filing both a Chapter 7 and a Chapter 13 case for the same client, one right after the other. A 7 plus a 13 equals a Chapter 20, get it?

Around this time you would be wondering why on earth anyone would want to file two consecutive bankruptcy cases, when they barely want to file at all.

The answer is that in selected cases it can be a good strategy. For example a debtor with $400,000 in unsecured debts and who is behind on his mortgage needs to file a Chapter 13 to stay in his house. But he can’t, because $400K is over the debt limit for Chapter 13. But if he files a Chapter 7 case, he wipes out that $400K debt in less than four months, and becomes eligible to file under 13. Voila — Chapter 20!

Congress tried to crack down on this strategy a few years ago by tinkering with the bankruptcy code. Now, if you get a discharge in one case, you can’t get another discharge in a Chapter 13 without waiting four years. However, the debtor in our example doesn’t really need another discharge, he just needs a way to catch up on missed mortgage payments. So “Chapter 20” lives on!


By Doug Beaton

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