The Bankruptcy Code is a set of federal laws found in Title 11 of the United States Code. The Bankruptcy Code is divided into nine chapters that deal with the different aspects of bankruptcy. The chapters are:
Chapter 1 – General Provisions
Chapter 3 – Case Administration
Chapter 5 – Creditors, the Debtor, and the Estate
Chapter 7 – Liquidation
Chapter 9 – Adjustment of Debts of a Municipality
Chapter 11 – Reorganization
Chapter 12 – Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income
Chapter 13 – Adjustment of Debts of an Individual with Regular Income
Chapter 15 – Ancillary and Other Cross-Border Cases
Chapters 7 or 13 (and sometimes 11 or 12) are used by individuals. In a Chapter 7, the debtor liquidates non-exempt assets to pay unsecured creditors and receives a quick discharge of all debts he cannot afford to pay, with a few exceptions. A Chapter 7 generally takes less than six months to finalize. When an individual files a Chapter 13, he enters into a repayment plan to pay his creditors what he can afford over a three to five year period under court supervision.
Note that there is no “Chapter 20” in the Bankruptcy Code. Chapter 20 is a creation of bankruptcy practitioners to describe the filing of a Chapter 7 liquidation bankruptcy, and then a quick filing of a Chapter 13 repayment bankruptcy. Why would anyone want to file two bankruptcy cases? That is a good question and there are some good answers for it!
Imagine that you are self-employed and have a non-dischargeable $80,000 tax debt to the IRS, and $20,000 in credit card debt. Money has been tight over the past year, and you haven’t been able to pay the IRS or keep up with your credit card payments. Then one day, surprise! The IRS freezes your bank account. What can be done? A Chapter 20 strategy can be used to rescue the money frozen by the IRS, discharge the $20,000 in credit cards through a Chapter 7 case, and then repay the $80,000 over five years with no interest or penalties (or threat of collection action) through a Chapter 13.
Chapter 20 can also be used to repay child support arrears without contempt of court hanging over your head, or cure a secured debt arrearage over three to five years, like a house or car payment. The primary benefit of discharging debt through a Chapter 7 initially is to free up money and eliminate creditors once and for all. If your circumstances improve during your Chapter 13 case, like you win the lottery, all you need do is pay the remaining balance in your Chapter 13 and walk away. The creditors discharged by your previous Chapter 7 case get nothing.
Chapter 20 is not right for every case, and is typically used only in rare circumstances. In some cases a court may allow you to file your Chapter 13 case before your Chapter 7 case has been discharged. Speak with your bankruptcy attorney to determine whether Chapter 20 is right for you.