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The Ol' Two-Step in Bankruptcy Cases in Arizona!

By Joseph McDaniel, Esq.

Once upon a time the concept of the "Chapter 20" was born.

That was, in general, a combination of a Chapter 7, to get the debtor to the debt level required for a Chapter 13, followed by a Chapter 13!

Note that the required intervals between Chapter 7 cases and Chapter 13 cases were increased by the Barf Act. 

The debt limits for Chapter 13 cases are located at 11 USC 109 (e), and they move around a fair amount. You'd think that a Congress which attempted to force folks to file Chapter 13 cases by inventing the ever-popular Means Test would have also raised the debt limit on Chapter 13 to the sky, or eliminated it entirely; but that would have been too easy! And because of the low debt limits in a Chapter 13, many folks with substantial debt may have to attempt to file a Chapter 7 under one of the exceptions to the Means Test, or file a personal Chapter 11, which is no fun at all for the debtor; and the cost/benefit analysis for personal Chapter 11 case is waaaaaay less good than for Chapter 7 Bankruptcy Cases.

There are other exotic bankruptcy combo platters, like the Chapter 18 (a Chapter 7 followed by a Chapter 11), but they are far less common than the good old Chapter 20, which is itself pretty rare these days, because the benefits of Chapter 13 Bankruptcy Cases are far less favorable than they were pre-2005.

There's a two-step dance that was used sometimes under the Post-New Code (1979) and Pre-Barf Act (2005), which was a simple negotiation or pay-down, or accord and satisfaction.

For instance, during the Golden Age of Consumer Bankruptcy in the United States, it was not unusual in a sophisticated bankruptcy practice to use a negotiation to drop the amounts of some debt, in order to reach the debt limits for a Chapter 13, in order to obtain the benefits of the late, lamented Superdischarge (which newly-minted "bankruptcy experts" in Arizona and the rest of the United States actually don't know about, because it was, well, after their time!).

And I know a couple of guys who were experts at inventing a "dispute" as to a big chunk of debt, in order that the debtor passed under the bar for a Chapter 13, because the debt limits there are for "undisputed" debt. 

And when a young, newly-minted bankruptcy lawyer asks me, "What is a Superdischarge?", I feel like Methuselah! On the other hand, I feel a little like Methuselah when I put on my tie in the mirror, so I don't blame the kids.

 Very much.

p.s. the best part of the Superdischarge under the pre-Barf Act New Code was that if a creditor filed a Complaint to Determine Dischargeability of Debt, you had the option of educating him about Chapter 13, and you could demonstrate pretty clearly that under a Chapter 13, his client would receive $312.73, so that the settlement value of the case dropped like a rock.

Now I know how my Grandfather felt when he talked about "the good old days"!

Full post as published by Arizona Bankruptcy Attorney Blog on December 30, 2010 (boomark / email).