If you look for “Chapter 20” in Arizona’s bankruptcy code, you will not find it. That’s because there is no Chapter 20 in the bankruptcy code. Chapter 20 refers to the process where you file Chapter 7 bankruptcy first, receiving your discharge and then Chapter 13 to pay back creditors who were not discharged in Chapter 7. This is often done in cases where filing only for Chapter 7 or Chapter 13 does not provide the necessary relief to the consumer.
At the Pew Law Center we look for creative ways to help our clients get that fresh start to their financial future. Bankruptcy laws can be complex and trying to sort it out on your own can be extremely intimidating and frustrating. If you are overwhelmed by mounting debt and are looking for a way to rebuild and reorganize your finances, please call or experienced Arizona bankruptcy attorneys at the Pew Law Center at 480-745-1770 for a complimentary consultation.
Getting the Best Out of Chapter 7 & 13
When you file for either Chapter 7 or Chapter 13, there are distinct advantages and disadvantages. Chapter 7, for example, will help you discharge your debts quickly. But, the challenge arises when you want to keep secured property such as a vehicle or a home, you must either pay the creditor an amount that is equal to the property’s replacement value or continue to make payments on the property as if the bankruptcy never happened. The benefit of a Chapter 13 bankruptcy is that it allows you to handle the debt through payment plans. But, it would require you to become committed to the payment plan and it could be several years before your debts are fully discharged.
What Chapter 20 does is that it allows those who need the relief Chapter 13 has to offer, but cannot qualify for it because of too much unsecured debt. In such cases, a Chapter 13 is filed soon after your Chapter 7 is completed. Courts in some situations may even permit the Chapter 13 to be filed before the Chapter 7 case is closed. Even though you cannot receive a discharge in Chapter 13 when you file it without waiting four years after Chapter 7, there may be other benefits that could prove appealing.
When Does Chapter 20 Make Sense?
There are a few situations when filing a Chapter 13 right after a Chapter 7 makes sense. For example, if you need the extra time because you have an overwhelming amount of debt, Chapter 20 can be beneficial. If you need additional time to pay off a mortgage or an auto loan but your overall debt exceeds the limits under Chapter 13, filing a Chapter 7 first can help diminish your overall debt. Once that burden is reduced, you may be able to qualify for Chapter 13.
You won’t get a second discharge in the Chapter 13. However, the second bankruptcy filing with give you the extra time you may need to pay down debts that you couldn’t wipe out under Chapter 7 such as tax debt. Also, if you are to make payments to pay off your debts, you need more cash flow. When you file a Chapter 7 first, it gives you the opportunity to bring down your unsecured debt so you have more of your income available to pay off your remaining debts. This can help to greatly reduce the length of your Chapter 13 plan period in addition to being able to get on the path to becoming debt-free at a quicker rate.
One more common reason to file a Chapter 20 is to get rid of a second or third mortgage through what is known as “lien stripping.” When you owe more on a first mortgage than the home is worth (when you are “upside down”) Chapter 13 allows the second mortgage to be stripped way and become an unsecured debt.
It is necessary to proceed with caution with a Chapter 20 bankruptcy because some judges and jurisdictions may not grant it due a possible lack of good faith on the debtor’s part. Some judges believe debtors are trying to game the system by using Chapter 20 bankruptcy as a tactic. When we advise debtors to take this route, we try to demonstrate good faith by convincing the court that there have been changes in our client’s financial situation since filing for Chapter 7 such as loss of employment, loss of additional income due to the death of a spouse or a divorce – all of which makes Chapter 13 necessary.
Requirements and Limitations
In order to be eligible to take the Chapter 20 route, you must be eligible to file a Chapter 7 and/or a Chapter 13. In order to take the first step and file a Chapter 7, you couldn’t have filed a Chapter 13 within six years immediately prior or a Chapter 7 within the last eight years. You must pass what is known as a “means test,” which basically compares your average monthly income for the six months before filing for bankruptcy with the state of Arizona’s median family income.
If your income is less than or equal to the state median, you are eligible to file Chapter 7. To qualify for Chapter 13, you must have a regular income that can support plan payments. When you file both Chapter 7 and Chapter 13, you will be required to list all of your debts in Chapter 7. When you file Chapter 13, you will list only secured debt and debt that you were not able to discharge in Chapter 7.
While Chapter 20 has its benefits, it might also come with certain limitations. Once you get your debts discharged in Chapter 7, you are no longer eligible to get a discharge in Chapter 13 unless four years have passed since you filed the Chapter 7. The point of filing Chapter 20 is really to get more time to pay off your debts, ones you could not discharge in Chapter 7. Some jurisdictions may not allow lien stripping. Also, you cannot use Chapter 20 if you want to protect your business or save other non-exempt properties and assets.
Contacting an Experienced Lawyer
In any bankruptcy case, there are no one-size-fits-all solutions. At the Pew Law Center, our mail goal is to help you discharge your debts and get a fresh start. We will explore every possible avenue and option to get you to that place. Call our bankruptcy lawyers temple, az today at 480-745-1770 to find out how we can help you.