There’s sort of a joke in New York bankruptcy referred to as “chapter 20,” which isn’t a real part of the Bankruptcy Code but a chapter 13 filing that follows a chapter 7 discharge, mainly to strip a discharged junior mortgage lien. I’ve discussed “chapter 20” in the past—as well as why it’s not always a good idea. The strategy works because the debtor is not seeking a discharge in chapter 13, so the four-year window that normally bars a discharge between the chapter 7 discharge and the chapter 13 one doesn’t matter.
The 7-plus-13 route, though, raises the question, “Can a debtor do a ‘reverse chapter 20’ bankruptcy?” The answer is yes, but given how the law is structured it’s probably not going to be deliberate.
However, that doesn’t mean it’s a bad idea.
The Bankruptcy Code forbids a chapter 7 discharge for six years after a chapter 13 discharge, but it creates an exception in Section 727(a)(9) under two circumstances:
(a) The debtor pays off 100 percent of all “allowed, unsecured claims,” aka a 100 percent repayment plan.
(b) The debtor pays off 70 percent of all “allowed, unsecured claims” and the plan was “proposed by the debtor in good faith, and was the debtor’s best effort.”
The definitions section of the Bankruptcy Code doesn’t define what a “good faith” proposal is or what efforts are sufficient to be the debtor’s “best,” but it’s probably safe to say that the debtor has to have unfortunate circumstances and do a solid job of making the payments on the repayment plan.
As stated above, it’s pretty clear that no one is going to try for a “reverse chapter 20” bankruptcy from the outset, particularly when completing a 100 percent repayment plan. The question, though, is who would successfully file chapter 7 shortly after chapter 13?
The answer is mostly people who fall on the kinds of hard times that prompt chapter 7 bankruptcies but happen to occur after a chapter 13 case: job losses, medical bills (despite the ACA), injuries, etc. Less common situations might be a double-dip recession or a new business that fails just after the chapter 13 case. Then of course, there are people who might want the benefit of the automatic stay to halt a foreclosure, but figure it’s worthwhile to proceed to discharge anyway.
Debtors hoping to obtain a discharge after taking the “70 percent” path will likely need to prove to the bankruptcy court in an adversary proceeding that their situations warrant the chapter 7 discharge. Arguing that requires an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney New York Bruce Weiner for a free initial consultation.
