There are many reasons why debtors convert their Chapter 7 bankruptcy to a Chapter 13 case. Some debtors simply make too much money to qualify for Chapter 7 bankruptcy and must convert to avoid dismissal of their case. Other debtors realize that Chapter 13 bankruptcy offers more options and is a better fit to accomplish their financial goals. Read on to learn more about converting your Chapter 7 bankruptcy to Chapter 13.
When You Might Convert a Chapter 7 Bankruptcy to Chapter 13
Below are some of the most common reasons you may wish to (or have to) convert your Chapter 7 bankruptcy to Chapter 13.
You Do Not Qualify for Chapter 7 Bankruptcy
Before you can file for Chapter 7 bankruptcy, you must pass a means test. The purpose of the means test is to disqualify high income debtors who can afford to pay back some of their debts. Generally, you cannot qualify for Chapter 7 bankruptcy if you have too much disposable income. If you fail the means test, you will have to either dismiss your Chapter 7 bankruptcy or convert it to a Chapter 13 case. (Learn more about the Chapter 7 bankruptcy means test.)
You Want to Catch Up on Your Mortgage or Car Payments
Chapter 7 bankruptcy does not provide debtors a way to catch up on missed mortgage or car payments. In most cases, your lender can easily obtain relief from the automatic stay in your Chapter 7 case to resume foreclosure or repossession of your property.
In contrast, Chapter 13 bankruptcy allows debtors to catch up on their missed payments through a repayment plan. As a result, if you are behind on your mortgage or car payments, converting your case to Chapter 13 may allow you to save your home or your car. (To learn how this works, see Your Home in Chapter 13 Bankruptcy and Your Car in Chapter 13 Bankruptcy.)
You Want to Strip Your Second Mortgage or Cram Down Your Car Loan
In addition to catching up on your missed payments, Chapter 13 bankruptcy may allow you to get rid of your second mortgage (or other junior liens) on your house. Typically, if your first mortgage balance exceeds the value of your house, you can file a motion to remove any junior liens from your house through a process called lien stripping.
Similarly, if certain conditions are met, you may be able to reduce the principal balance on your car loan through a Chapter 13 cramdown. You cannot strip your second mortgage or cram down your car in Chapter 7 bankruptcy.
You Have Nondischargeable Priority Debts
Certain obligations, called priority debts, cannot be discharged in Chapter 7 bankruptcy. Common priority debts include alimony, child support, and certain tax obligations. If you have priority debts, unlike Chapter 7 bankruptcy, Chapter 13 can allow you to pay them off through a repayment plan over the course of your bankruptcy. (Get specifics on debts that are discharged in Chapter 13, but not in Chapter 7.)
You Have Nonexempt Property
In Chapter 7 bankruptcy, the trustee is authorized to sell your nonexempt assets to pay your creditors. If you filed for Chapter 7 bankruptcy and don’t want to lose your nonexempt property, you may be able to convert your case to Chapter 13. In Chapter 13 bankruptcy, you get to keep your nonexempt assets in exchange for paying your unsecured creditors an amount equal to their value. (Learn about exempt and nonexempt property.)
Absent bad faith (such as committing fraud or abusing the bankruptcy system), you have a one-time right to convert your bankruptcy from Chapter 7 to Chapter 13 (meaning you don’t have an automatic right to convert if your case has already been converted once). However, you must still show that you have enough income to afford a Chapter 13 repayment plan. If you can’t, the trustee may argue that you are trying to convert your case in bad faith. (Find out about Chapter 13 plan requirements in our Chapter 13 Repayment Plan topic area.)
How to Convert Your Chapter 7 Bankruptcy to Chapter 13
To convert your Chapter 7 to a Chapter 13 bankruptcy, you typically have to file a motion with the court. In the motion, you must tell the court your reasons for converting and show that you can afford to be in a Chapter 13 bankruptcy. Since you have a one-time right to convert, these motions are usually approved by the court unless there is evidence of bad faith or you are otherwise ineligible to file for Chapter 13 bankruptcy.