Friday, November 4, 2011

Chapter 20 Bankruptcy?

Chapter 7 Bankruptcy is primarily for consumers. Chapter 13 Bankruptcy is primarily for people who can pay a percentage of the debts they owe. But what is a Chapter 20?  There is no Chapter 20 in the Bankruptcy Code. It is a theory, an intellectual pondering, on a scenario wherein someone files a Chapter 13 to reorganize their secured debt, and then converts the case to a Chapter 7 to get rid of their unsecured debt. Some use the scenario where a Chapter 7 is filed and when a discharge is received, a Chapter 13 is filed to reorganize the remaining debt. Most theorists would say that converting to Chapter 7 from a 13 should only be used, and is only possible, when a Chapter 13 debtor’s financial circumstances have worsened after filing. Otherwise, someone who filed a 13 with the intention of later converting to a 7, would be planning to fail, and could, in essence, be viewed as abusing the system. When one files a Chapter 13, the creditors have the comfort of knowing that they will be paid part of what is owed, according to the plan the debtor has filed. When someone files a Chapter 7, the creditors all back off and do nothing. At the very least, the creditor can report the money owed as a loss for that calendar year, a direct deduction from gross income. There do not appear to be yearly figures available for the number of Chapter 13 bankruptcies which have been converted to Chapter 7, nor do there appear to be any statistics available for those converting a 7 to a 13. The Bankruptcy Code allows the debtor to convert a chapter 7 case to a chapter 13 case as long as the debtor is eligible under the new chapter. However, a condition of the debtor's voluntary conversion is that the case has not previously been converted to Chapter 7 from another chapter.  In addition, a debtor cannot receive a Chapter 13 discharge if the debtor has received a Chapter 7 discharge within the last 4 years. Moreover, a Chapter 13 debtor who suffers a drastic loss in income, has a right to convert the case to Chapter 7. So, there are two forms of Chapter 20 Bankruptcy, which combine 7 and 13. One being a 7 followed by or converted to a 13, and the other being a 13 followed by or converted to a 7. In either scenario the debtor is required at all times to act in good faith. Here is a link to a case which discusses Chapter 20:

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