A very recent opinion from the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) establishes the legitimacy of something I have been doing in Chapter 20 cases. It’s nice to know I was right all along. This post brings you up to speed on the good news for debtors in the BAP case. A bit of background will help to put the case into its proper perspective.
If you are new to bankruptcy practice, and have given the Bankruptcy Code a cursory glance, you might think I am out of my mind referring to a Chapter 20 bankruptcy in the tile to this post. After all, the Code doesn’t even have a Chapter 20. (Whether or not I am out of my mind is best left to the many voices in my head to determine. What did you say? Are you calling my dog a liar?) The term, “Chapter 20” is used by bankruptcy attorneys to refer to a Chapter 7 followed by a Chapter 13. Since 7 + 13 = 20, Chapter 20 is used as a short hand.
I. Reasons For Doing A Chapter 20
Since Chapter 7 discharges most debts without the debtor having to make any payments to creditors, why would anyone want to do a Chapter 20? One reason lies in 11 U.S.C. § 109(e)’s debt ceilings (I have corrected the dollar amounts, which haven’t been updated at the linked site for quite some time.):
Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.
Based on this Code section, if a debtor has more than $383,175 in noncontingent (i.e., doesn’t depend on a triggering event for its validity), liquidated (i.e., the dollar amount of the debt is certain), unsecured (i.e., there is no collateral securing the debt) debt, then Chapter 13 is unavailable.
Since Chapter 7 has no debt ceilings (though it does have income ceilings, which can be made precise using 11 U.S.C. § 707(b)), the debtor can first do a Chapter 7 to get rid of as much unsecured debt as possible, and then do a Chapter 13 to deal with debts that weren’t discharged in the prior Chapter 7, or to catch up on a delinquent mortgage.