Despite its official-sounding name, chapter 20 is not a type of bankruptcy you can file but rather a strategic way of using a combination of chapter 7 and chapter 13 to deal with debt that neither individual bankruptcy option can handle alone. While it's not a good option for every type of financial situation, here are two times when it can be beneficial.
You Have Way Too Much Debt
Chapter 13 bankruptcy lets you pay off your debts over a period of 3 to 5 years. It's good for dealing with items that can't be eliminated in a chapter 7, such as student loans and certain back taxes. Although it is typically easier to qualify for this type of bankruptcy, the plan has two kinds of debt caps.
The first limit is your disposable income. You must have enough money left after paying living expenses (i.e., disposable income) to make big enough payments to eliminate your debt within the time period. If your income won't pay off the required amount no matter how the court finesses the numbers, your petition for chapter 13 will be denied.
The second cap is a hard upper limit on the amount debt you can push through a chapter 13. You can't have more than $394,725 in unsecured debt (e.g., credit cards) and $1,184,200 in secured debt (e.g., home loan). Your petition will also be denied if your total debts exceed these amounts.
Filing chapter 7 prior to doing a chapter 13, however, can help you eliminate enough debt to qualify for the latter by either freeing up more disposable income or reducing your debt load. It's certainly worth discussing this option with a bankruptcy attorney if you're facing this problem.
You Have a Ton of Debt You Can't Discharge
Another reason you would want to do a chapter 20 is if you have a lot of non-dischargeable debt. Chapter 7 is great at wiping out bills, but there are some bills it can't touch, such as student loans, child support, certain criminal fines and penalties, some taxes, and personal injury judgments arising from DUI accidents.
If you have a lot of non-dischargeable debt, your best option is to file a chapter 13 right after doing a chapter 7 to help you manage it. Not only would your payments likely be smaller than what your creditors would require, but those creditors would be prohibited from engaging in collection action while your case is still active.
There are other reasons a chapter 20 strategy may be the best option. Contact a law firm that offers bankruptcy attorney services for more information about this type of bankruptcy or help managing your case.