Thursday, January 15, 2015

Chapter 13 + Chapter 7 = Chapter 20

It is possible to file Chapter 7 first, followed by Chapter 13 in what is euphemistically referred to as “Chapter 20.” 

WARNING:  This strategy is controversial and is disfavored by both Bankruptcy Trustees and Bankruptcy Judges.  The risk of objection is much higher than normal when using this strategy. 

This strategy only applies to debtors who are eligible for Chapter 7 and in addition have an objective that cannot be accomplished in Chapter 7 alone.

For example, a below median income debtor who owes the IRS and is behind on a car payment who may get a better job 2 or 3 years from now, may choose to file Chapter 7 and get a discharge and then go into Chapter 13 to pay off the IRS and the car without having to pay more to unsecured creditors due to the increase in income.

It is the protection of future income that would not have been protected if the Debtor just filed Chapter 13 alone that makes this strategy unfair from creditors point of view especially if increased earnings are sufficient to pay 100% of debt.

Please keep the point of view of the creditors,Bankruptcy Trustees, and Bankruptcy Judges in mind when you contemplate strategies.  My standard advice is not to do anything that you would be uncomfortable explaining in open court.

WARNING: If the debtor reasonably expects the change in job within 1 year of filing, that must be disclosed along with any earned, but not yet received, income such as commissions.

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