If an income loss prevents you from making your Chapter 13 plan payment, you might want to convert from Chapter 13 bankruptcy to Chapter 7. Converting to Chapter 7 lets filers out of the three- to five-year Chapter 13 plan and erases qualifying debts in as little as four months. Conversion can be a great option, especially when you don't qualify to modify your Chapter 13 payment.
However, problems frequently arise, so if you want to explore converting from Chapter 13 to Chapter 7, seek a local bankruptcy lawyer who can:
You can prepare for your meeting by learning about eligibility issues and when the court might force you to convert to Chapter 7 bankruptcy. We explain these issues below.
Before you convert your case from Chapter 13 to Chapter 7, you'll need to check whether you qualify and determine what will happen to your property. Many people convert because of an income reduction or job loss, so qualifying isn't usually a problem. However, losing property you were hoping to protect when you filed for Chapter 13 can happen.
Here's what you'll need to consider and what you can expect when you convert from Chapter 13 bankruptcy to Chapter 7 bankruptcy.
Before switching to Chapter 7, you must clear an eligibility hurdle by passing the Chapter 7 means test. The means test looks at your income and expenses to determine if you can afford to pay some debts through a Chapter 13 plan. If you can, you won't qualify for Chapter 7.
Even though some courts don't require debtors to complete the means test before converting from Chapter 13 to 7, the Chapter 7 trustee assigned to your case will evaluate your updated income and expense disclosures. If you have a significant amount remaining after subtracting your expenses from your income, either the trustee or a creditor will likely object on the basis that you have the means to pay something to creditors.
The bankruptcy court will deny the conversion if your budget indicates you have money remaining to pay some or all of your debts. A local bankruptcy attorney can advise you about the practices in your area.
It depends on whether you've filed for Chapter 7 before. Simply put, you can't wipe out debts whenever you'd like. The multiple bankruptcy filing rule limits you to a Chapter 7 discharge every eight years, even when you convert from Chapter 13 to Chapter 7.
If you've never filed for Chapter 7 or filed over eight years ago, this rule won't be a problem. But if you filed within the last eight years and received a debt discharge, you'll have to wait until the eight-year period elapses before erasing more debt.
That's not to say you can't convert your Chapter 13 case to Chapter 7—you can. But you wouldn't receive a debt discharge. And because of that, if you're like most, filing wouldn't be worth your time.
The only benefit of filing for Chapter 7 when you aren't entitled to a discharge is that it might save you some work. Even so, it will likely cost you more money.
The major benefit is you won't have to sell your property yourself. The trustee will sell any "nonexempt" property you can't protect with a bankruptcy exemption and use the proceeds to pay creditors. The payments would reduce the amount owed to those creditors, but you'd still be required to pay the remaining balances when your Chapter 7 case ended. None of your debt would get erased.
The problem? Most people don't find this helpful. Because you'd likely sell your property for more and avoid the bankruptcy trustee's service fee altogether, you'd probably do better avoiding Chapter 7 and selling your property and repaying creditors on your own.
The bankruptcy court can order you to convert to Chapter 7 "for cause" or a good reason. However, courts don't usually force conversions if you're doing your best and paying in "good faith" or to the best of your ability.
For instance, suppose you miss a payment due to unforeseen car repairs. Or you can't propose a repayment plan the bankruptcy court will approve or "confirm" despite your best efforts. The court would probably dismiss the Chapter 13 case instead of forcing you to convert to Chapter 7, which would be a much better outcome if you were at risk of losing property in Chapter 7.
It would be a different story if you were up to no good. The bankruptcy court would be more inclined to convert a case involuntarily if a debtor were manipulating the system to avoid paying creditors.
Here's what you can expect after converting your case.
Paperwork. In most courts, the bankruptcy petition and forms filed in your Chapter 13 case become a part of your converted Chapter 7 matter, although some jurisdictions require a new set of schedules, even if nothing has changed. At a minimum, you should plan on taking the means test, updating your income and expenses, and listing any debts incurred after filing Chapter 13. The new debts can be discharged in your Chapter 7 case if they qualify.
You'll also file the Statement of Intention for Individuals Filing Under Chapter 7, a form that tells the court and creditors whether you plan to keep "secured" property you're still paying for, such as a car or home.
Creditors' meeting. You must attend another meeting of creditors, even if you attended one in your Chapter 13 case.
Exemptions. In most cases, the court will determine your property exemptions as of the date you filed for Chapter 13 bankruptcy. However, a creditor might object to this date if you're discharging debts incurred after the initial Chapter 13 filing.
Creditor payment claims. Existing creditors' proofs of claims, the forms creditors submit for payment in bankruptcy, carry over to your Chapter 7 case. If the Chapter 7 trustee sells nonexempt property, making money available for creditors, new creditors will be given time to file a proof of claim.
Debtor education course. You'd need to take the second education course if you hadn't already before you'd be entitled to a Chapter 7 discharge. Learn about the two education courses you'll take in bankruptcy.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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