When File a “Chapter 20”?

If you need more help on payment terms with debts that can’t be discharged, filing Chapter 13 right after Chapter 7 may be your best option.

Last week we introduced the so-called “Chapter 20”—filing a Chapter 13 case right after completing a Chapter 7 one. The focus was on doing this to discharge enough debts in Chapter 7 “straight bankruptcy” case to be able to qualify under the debt limits of the Chapter 13 “adjustment of debts” case.

But there are a number of other situations when this “Chapter 20” strategy can be very helpful. Today we give you one more. As you consider filing bankruptcy, it’s important to understand all these options.

Leverage against a Debt Not Discharged

Certain debts aren’t discharged in a Chapter 7 case, for two broad reasons. First, the law doesn’t let you discharge that kind of debt. Or second, you choose not to discharge it because you want to keep the collateral—such as a home or vehicle.

After carefully consulting with your bankruptcy lawyer, you learn that debt won’t be discharged. You file a Chapter 7 case expecting to be able to negotiate a way to pay that debt.

For example, imagine that you owe some income taxes that can’t be discharged. Or you are behind on your mortgage on a home you want to keep. You expect to be able to take care of these debts through negotiation after discharging all or most of your other debts in the Chapter 7 case.

But then one of two things happens.

First, the negotiations don’t go as well as you hoped. The IRS or state tax agency demands that you pay monthly more than you can afford. Or your mortgage holder gives you less time to catch up on the missed payments, threatening to resume foreclosure.

Or second, your circumstances change. Your finances deteriorate after filing your Chapter 7 case, or the debt you have to pay is more than expected. Your income unexpectedly goes down or your expenses go up. So you can’t pay what you’d expected to be able to each month. Or you owe more in taxes or are further behind on your mortgage than you expected.

The Chapter 13 Solution

A Chapter 13 case can usually reduce monthly payments on ongoing debts like unpaid income taxes or mortgage arrearage. If you find out soon after your Chapter 7 case is finished that you need help with one or more of your ongoing debts, you can get that help through Chapter 13. It won’t discharge any debts. (It won’t unless the Chapter 13 case is filed at least four years after your Chapter 7 case was filed.) But it will force your creditor to give you more time and more flexible payment terms.

Or you may find out that you need help with your ongoing debts while your Chapter 7 case is still active. Then your bankruptcy lawyer would likely be able to “convert” it into a Chapter 13 case.

This is a little different than completing a Chapter 7 case, getting a discharge of your dischargeable debts, and then filing a new Chapter 13 case. With a “conversion,” you don’t get a Chapter 7 discharge since the case was not completed. Instead you get a Chapter 13 discharge once it’s completed. But either way you are able to force the creditor(s) whose debt(s) that aren’t being discharged into accepting smaller payments and more flexible terms.