What is a Chapter 20 Bankruptcy?

       A Chapter 20 Bankruptcy is the situation where a debtor files for Chapter 7, and then immediately refiles another case under Chapter 13.  The purpose are a few reasons why a debtor would want to take this strategy.  The first purpose is to reduce the monthly payments that will be required in a Chapter 13 plan.  If a person has $50,000 of general unsecured consumer debt (such as medical bills and credit cards) and also has $50,000 of student loans, which is not dischargeable, then chapter 13 payments to pay everyone in full would be $1,666.67 per month for 60 months.  However, if the debtor first files Chapter 7 bankruptcy, then $50,000 of the consumer debt would be discharged. After the case is closed the debtor can immediately refile under Chapter 13 in order to pay the nondischarged student loans.  That monthly payment would be $833.33 for 60 months. 

       Another reason to file a chapter 20 is because the debtor exceeds the Chapter 13 debt limits.  Currently, a debtor cannot file a Chapter 13 bankruptcy if the unsecured debt exceeds $360,475.  Chapter 7 has no debt limits.  Thus, a debtor may have $400,000 in unsecured debt, which is mixed with dischargeable and nondischargeable debt, as well as secured debt of a house and car.  The debtor (if he qualifies for a chapter 7) file the chapter 7 first reduce the overall debt to be under the debt limit.  Then the debtor could file a Chapter 13 bankruptcy in order to cram-down the car loan or strip off a second mortgage on a house.

       Now, one thing to remember is that by filing a Chapter 7 first, the debtor will not be eligible for a second discharge in the Chapter 13 bankruptcy.  All of the consumer debt would've already been discharged in the Chapter 7, but the debtor would be liable for any deficiency if he later choose to surrender the house or car in the chapter 13 bankruptcy.  

Cars in Bankruptcy: The Cram Down “910 Car Claim”

       One of the luxuries of the Bankruptcy Code is the ability to Cram Down the amount you pay on your vehicle. The Bankruptcy Code allows you to (1) lower your interest rate to as low as 3.25% instead of keeping it at that 18% interest rate at which you bought your car; and (2) lower the overall payment of your car to its value instead of the balance on the loan. (This also includes Title Loans on your car) There is only 1 caveat. The loan on the car must have been acquired more than 910 days before the filing of the Bankruptcy case. If the loan on your car is less than 910 days, then you will have to pay the full balance on the loan but not the contractual interest rate. Here is an example to illustrate.

       Assume you bought your car 2 and a half years ago for $25,000 at an interest rate of 15%. Your remaining balance on the loan is $12,500, but the value of your car is now $6,000. Well, in the bankruptcy, you are allowed to “Cram Down” the loan to the value of the car and reduce the interest rate to as low as 3.25%. Therefore, you are now paying only $6,000 at 3.25%. Moreover, we can assume that you only had 2 years left to pay on balance of the loan according to its terms, but through bankruptcy you also get to extend the loan to another 3 or 5 years which would make your payments considerably lower. Under the original terms, the monthly payments would be $695.77. But under the Cram Down, the payments would be $108.48 if extended out by 5 years.

       It must also be noted that the 3.25% is a general rate that has been established for the Middle District of Tennessee, other districts and circuits may have different standards.