Bankruptcy Case Analysis

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In spite of the fact that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 no longer allows “Chapter 20” filings, this decision is of enormous importance. In fact, its importance is amplified because of the Act.

A typical Chapter 20 filing works as follows: an overwhelmed debtor, with a mortgage on his home, and lots of credit card debt, files Chapter 7; the credit card debt is discharged; the debtor then files Chapter 13, and makes payments only on the secured debt. In this way, the debtor’s monthly Chapter 13 payments are lower than if he had filed Chapter 13 initially, and the debtor avoids foreclosure on his home.

With the passage of the Act, a debtor must wait 4 years after discharge of the Chapter 7 before filing for Chapter 13.

Regardless of whether one considers “Chapter 20” a legitimate practice (Congress apparently thought not), it was perfectly legal. Debtors who received a Chapter 7 discharge prior to Oct. 17 could quickly file for Chapter 13 and take advantage of the procedure before it was closed.

The case at bar bears little resemblance to this typical procedure. The Chapter 13 appears to have been filed for no reason except to receive a stay in the Chapter 7 that would have found his debt nondischargeable.

Nevertheless, the decision — prohibiting all simultaneous chapter 20 filings, regardless of the debtor’s good faith — will adversely affect many debtors who attempted a legal practice.

Suppose a typical debtor described above filed for Chapter 7, intending that, after his unsecured debt was discharged, he would then file Chapter 13. However, with Oct. 17 fast approaching, it became clear that the Chapter 7 would not be finalized by then, and the Chapter 13 would be barred for four years. A rational response would be to file Chapter 13 anyway, and hope to achieve the same result, notwithstanding that the Chapter 7 was still pending.

Had the Seventh Circuit adopted the minority approach, the bankruptcy courts would have to hold hearings in all those cases to determine whether the Chapter 13 petition was filed in good faith.

	Related Links 7th Circuit Court of Appeals Related Article Simultaneous ‘Chapter 20’ filings barred

The lower courts could reasonably have disagreed whether such filings are in good faith or not. Our hypothetical assumes the credit card debts are dischargeable, and the motive was merely to take advantage of the old Bankruptcy Code before it changed — nothing as pernicious as in the case at bar. The result would have been a lengthy state of uncertainty until one of these cases reached its way to the Seventh Circuit.

Instead, these simultaneous Chapter 20 cases are facially invalid and can be dismissed without a hearing on good faith, with one exception. The court stated, in adopting the majority rule, “This is not a case which the Chapter 7 proceeding was finished except for some minor technicalities at the end, like the filing of a trustee’s final report.”

If the Chapter 7 was almost complete when the debtor filed a Chapter 13 plan on Oct. 17, a debtor could plausibly argue that this sentence by the court allows for an exception in his case.

– David Ziemer

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David Ziemer can be reached by email.