If you are struggling with significant debt in Illinois and have explored your options under the federal Bankruptcy Code, you may have heard of the term ‘Chapter 20 Bankruptcy’. Unlike Chapter 7 or Chapter 13, there is no official Chapter 20 in the U.S. Bankruptcy Code. Instead, ‘Chapter 20’ is a legal strategy – named because 7 + 13 = 20 – in which an individual first files for Chapter 7 bankruptcy to discharge eligible unsecured debts, and then files for Chapter 13 bankruptcy to address remaining obligations, such as mortgage arrears, tax debts, or certain secured claims.
Illinois residents facing overwhelming financial burdens may find that this two-step approach offers a path that neither Chapter 7 nor Chapter 13 alone can provide. Understanding how this strategy works under both federal bankruptcy law and Illinois-specific rules is an important first step before deciding whether it is right for your situation.
What Is Chapter 20 Bankruptcy?
Chapter 20 is not a standalone bankruptcy chapter. It is a legal strategy that combines two separate bankruptcy filings:
- Chapter 7 bankruptcy – also called ‘liquidation’ bankruptcy – which can discharge (eliminate) qualifying unsecured debts such as credit card balances, medical bills, and personal loans.
- Chapter 13 bankruptcy – also called ‘reorganization’ or ‘wage earner’s plan’ – which allows filers to catch up on secured debts like mortgage arrears or certain tax obligations through a structured repayment plan lasting three to five years.
By filing Chapter 7 first, the debtor eliminates a large portion of unsecured debt. Then, by filing Chapter 13 shortly after, the debtor may be able to address secured debts or priority claims that were not discharged in Chapter 7 – often with a more manageable repayment burden because unsecured debts have already been cleared.
How Chapter 20 Works in Illinois
Federal bankruptcy law governs both Chapter 7 and Chapter 13 filings across the United States. However, each state has its own exemptions, local rules, and court practices that affect how bankruptcy cases unfold in practice. Illinois has specific provisions that Illinois filers need to understand.
Illinois Bankruptcy Exemptions
Illinois is an ‘opt-out’ state, which means filers must use Illinois’ state exemptions rather than the federal bankruptcy exemption system. Key Illinois exemptions relevant to Chapter 20 strategy include:
- Homestead Exemption: Illinois allows a homestead exemption of up to $50,000 of equity in a primary residence ($100,000 for joint filers). This is notably lower than exemptions available in some other states, making strategic planning particularly important for Illinois homeowners.
- Personal Property Exemptions: Illinois provides exemptions for certain personal property, including up to $4,000 in general personal property and $2,400 for a motor vehicle.
- Wage Garnishment Protections: Under Illinois law, wage garnishment is limited, offering some protection for ongoing income during the bankruptcy process.
Because Illinois homestead exemption amounts are relatively modest, homeowners with significant equity may find that a Chapter 20 approach – using Chapter 7 to address unsecured debts and then Chapter 13 to manage mortgage arrears – may help preserve their home. Consulting with a qualified Illinois bankruptcy attorney is important for evaluating how exemptions apply to your specific circumstances.
The ‘Lien Stripping’ Consideration in Chapter 20
One historical motivation for Chapter 20 filings was the ability to ‘strip’ a second mortgage or junior lien in Chapter 13 after receiving a Chapter 7 discharge. In a Chapter 13 case, if a second mortgage is entirely underwater – meaning the home’s value does not exceed the balance of the first mortgage – the debtor may be able to reclassify that second lien as unsecured debt and potentially have it discharged at the end of the Chapter 13 plan.
However, the U.S. Supreme Court’s decision in Caulkett v. Bank of America (2015) has significantly impacted this strategy. Courts have also addressed whether a Chapter 13 filer who received a Chapter 7 discharge is eligible for a Chapter 13 discharge at the end of the plan. Under 11 U.S.C. § 1328(f), a debtor who received a Chapter 7 discharge within four years of filing Chapter 13 is generally not eligible to receive a Chapter 13 discharge. This does not necessarily eliminate the value of a Chapter 20 approach for some debtors, but it does affect the strategy’s scope and outcomes. An experienced Illinois bankruptcy attorney can help you evaluate whether and how Chapter 20 might apply to your situation given current law.
Who May Consider a Chapter 20 Strategy in Illinois?
Chapter 20 may be worth discussing with a bankruptcy attorney if you are an Illinois resident who:
- Has significant unsecured debt (such as credit cards or medical bills) that would qualify for Chapter 7 discharge but also has mortgage arrears or other secured debts that need restructuring.
- Has income above the Illinois median income threshold for Chapter 7 eligibility, but whose income and debt composition may still allow Chapter 7 qualification after the means of test.
- Is at risk of foreclosure on an Illinois home and needs time and a structured plan to catch up on missed mortgage payments.
- Has priority tax debts or other non-dischargeable obligations that would benefit from a Chapter 13 repayment plan after reducing overall unsecured debt load through Chapter 7.
Illinois’s median income figures (used in the Chapter 7 means test) are periodically updated by the U.S. Trustee Program. Whether you qualify for Chapter 7 depends on your household size, income, and allowed expenses under the means of test formula. An Illinois bankruptcy attorney can run a means of test analysis to determine your eligibility.
Timing and Legal Requirements for Chapter 20 in Illinois
There are important timing rules that apply to sequential bankruptcy filings under federal law:
- A debtor must generally wait until their Chapter 7 case is fully discharged before filing into Chapter 13. The timing between filings affects discharge eligibility in the Chapter 13 case.
- Under 11 U.S.C. § 1328(f)(1), if a Chapter 7 discharge was received within four years prior to the Chapter 13 filing, the debtor will not be eligible for a Chapter 13 discharge at the end of the plan. This does not prevent the Chapter 13 case from being filed or from providing a repayment plan structure, but it does mean the debtor cannot discharge remaining balances at plan completion.
- The automatic stay – the legal protection that stops creditor collection of actions, foreclosure proceedings, and garnishments – applies in both Chapter 7 and Chapter 13 filings. In Chapter 20 situations, courts may scrutinize whether the combined filing strategy constitutes good faith, as required by the Bankruptcy Code.
- Illinois bankruptcy cases are filed in one of the three federal districts covering Illinois: The Northern District of Illinois (headquartered in Chicago), the Central District of Illinois, or the Southern District of Illinois. Local rules and judicial practices vary by district.
The Good Faith Requirement
Both Chapter 7 and Chapter 13 filings require that the debtor act in ‘good faith.’ Courts have addressed whether filing Chapter 13 shortly after a Chapter 7 discharge – specifically in the context of a Chapter 20 strategy – satisfies good faith requirements under 11 U.S.C. § 1325(a)(7). Courts generally evaluate good faith based on the totality of circumstances, including the debtor’s financial situation, the purpose of the filings, and whether the strategy appears to be an honest effort to address debt rather than an attempt to abuse the bankruptcy process.
An Illinois bankruptcy attorney can help you structure a Chapter 20 approach – if appropriate – in a way that is transparent, well-documented, and positioned to withstand court scrutiny.
Chapter 20 vs. Chapter 13 Alone: Key Differences
For some Illinois residents, Chapter 13 alone may accomplish similar goals. The potential advantage of Chapter 20 over a standalone Chapter 13 filing is that clearing unsecured debt through Chapter 7 first may:
- Reduce the total amount that must be paid into the Chapter 13 plan, since unsecured creditors in Chapter 13 generally must receive at least what they would receive in a Chapter 7 liquidation.
- Potentially allow for a shorter or more affordable Chapter 13 repayment plan.
- Provide a cleaner financial picture when entering Chapter 13, making it easier to manage the plan’s required payments.
However, the trade-off is the loss of Chapter 13 discharge eligibility if the Chapter 7 discharge was received within the prior four years. This means any debts that remain unpaid at the end of the Chapter 13 plan would not be discharged. Every situation is different, and whether Chapter 20 provides an advantage over Chapter 13 alone depends on the specific details of your income, debt, and assets.
Illinois-Specific Considerations for Bankruptcy Filers
Illinois Foreclosure Timeline
Illinois is a judicial foreclosure state, meaning lenders must go through the court system to foreclose a home. The Illinois foreclosure process can take several months to over a year, depending on the circumstances. Filing Chapter 13 as part of a Chapter 20 approach can invoke the automatic stay, which may temporarily halt a foreclosure proceeding and provide time to restructure mortgage arrears through a repayment plan.
Illinois Tax Obligations
Illinois has a flat state income tax. Certain Illinois state tax debts may be treated as priority claims in bankruptcy, similar to federal income tax debts. Priority tax obligations are generally non-dischargeable in Chapter 7 but may be paid through a Chapter 13 plan over time, making a Chapter 20 approach potentially useful for debtors facing both state tax debt and mortgage arrears.
Credit Counseling and Debtor Education Requirements
Under federal law, individuals filing bankruptcy in Illinois – as in all states – must complete a credit counseling course from an approved agency within 180 days before filing, and a debtor education course before receiving a discharge. These requirements apply to both Chapter 7 and Chapter 13 filings in a Chapter 20 strategy.
Working with an Illinois Bankruptcy Attorney
Chapter 20 bankruptcy is a complex legal strategy that requires careful analysis of your income, debts, assets, and goals. Illinois-specific exemption rules, local court practices, and the evolving case law surrounding sequential filings all affect whether and how this approach can be used effectively.
- Evaluate whether you qualify for Chapter 7 under the Illinois means of testing.
- Analyze how Illinois exemptions apply to your assets.
- Assess whether a Chapter 20 strategy is appropriate for your specific financial situation.
- Guide the timing of filings to maximize legal protections and minimize risks.
- Represent you in the bankruptcy court(s) for both Chapter 7 and Chapter 13 cases.
- Help ensure your filings meet good faith and other legal requirements.
Every bankruptcy case is unique. The information on this page is provided for general educational purposes and does not constitute legal advice. Bankruptcy law is complex and changes over time. You should consult with a licensed Illinois bankruptcy attorney to understand how the law applies to your individual circumstances before making any decisions.
Frequently Asked Questions: Chapter 20 Bankruptcy in Illinois
Is Chapter 20 bankruptcy available in Illinois?
Chapter 20 is not an official chapter of the Bankruptcy Code. It is a strategic approach – available in Illinois as in other states – that involves filing Chapter 7 followed by Chapter 13. An Illinois bankruptcy attorney can help you determine whether this approach makes sense for your situation.
Will I be able to get a Chapter 13 discharge if I recently received a Chapter 7 discharge?
Under 11 U.S.C. § 1328(f)(1), if you received a Chapter 7 discharge within four years before filing Chapter 13, you will not be eligible for a Chapter 13 discharge at the end of the plan. This does not prevent you from filing Chapter 13 or using a repayment plan to address secured debts, but any remaining unsecured balances at the plan’s end would not be discharged.
How does Illinois’s homestead exemption affect a Chapter 20 strategy?
Illinois’s homestead exemption is $50,000 per individual ($100,000 for married joint filers). Homeowners with equity exceeding this amount may face complications in Chapter 7. An attorney can help evaluate how your home equity affects your bankruptcy options.
How long does a Chapter 20 case take in Illinois?
A Chapter 7 case typically takes three to six months to complete. A Chapter 13 case runs three to five years. In a Chapter 20 strategy, the total timeline from Chapter 7 filing through Chapter 13 plan completion could span four to six years or more, depending on your situation and the district in which you file.
Can Chapter 20 stop foreclosure in Illinois?
The automatic stay that goes into effect upon a bankruptcy filing can temporarily halt foreclosure proceedings. Illinois is a judicial foreclosure state, and Chapter 13 (the second filing in a Chapter 20 strategy) may allow you to cure mortgage arrears through a repayment plan. An attorney can advise whether this is a viable option given at the stage of any foreclosure proceedings you may be facing.
Contact Our Illinois Law Office
If you are an Illinois resident dealing with overwhelming debt and want to understand your options – including whether a Chapter 20 approach may be right for your situation – we encourage you to reach out. We serve clients throughout Illinois. Schedule a free consultation to discuss your circumstances in detail.