Sometimes a Chapter 13 debtor will need or want to convert a bankruptcy case from a Chapter 13 to a Chapter 7 bankruptcy. And sometimes the bankruptcy court will force a conversion. Although the reasons to convert vary, many filers will consider a conversion when:
- financial circumstances have changed, and the filer isn’t able to make the Chapter 13 plan payments any longer, or
- the debtor filed for Chapter 13 bankruptcy primarily to keep property that isn’t wanted anymore (for example, a home or an expensive musical instrument).
For the most part, you have a right to convert your case. But that doesn’t always mean you’ll qualify for Chapter 7 relief. Learn about eligibility issues, as well as when the court might force you to convert to Chapter 7 bankruptcy.
Will You Qualify to File for Chapter 7 Bankruptcy?
Before you can take advantage of Chapter 7 bankruptcy, you’ll need to clear a few eligibility hurdles—the biggest one being passing the means test.
- What is the means test? The means test looks at your income and expenses and essentially determines whether you can pay some of your debts through a Chapter 13 plan. If you can, you don’t qualify for Chapter 7. (To learn more, see The Bankruptcy Means Test.)
- Does the means test apply to converted cases? Not all courts agree about whether you must pass the means test—but the debate is more a matter of form over substance. All courts recognize that allowing filers to avoid the means test by filing for Chapter 13 first and then converting to Chapter 7 would create an unacceptable loophole that would allow high-income filers to avoid paying back creditors. The law—as it stands—has a mechanism to prevent such outcomes. Even if you aren’t required to take the means test, if the trustee (or a creditor) shows that you have enough income to repay some of your debt—usually shown by comparing your income to your reasonable expenses—then the court will likely deny the conversion for cause. (See how courts within the same state disagree on this point by reading In re Thoemke, 2014 WL 443890 (Bankr. M.D. Fla. 2014) and In re Summerville, 515 B.R. 651 (Bankr. M.D. Fla. 2014). A local attorney can advise you about the practices in your area.)
- Will you pass the means test? What if you originally filed for Chapter 13 because you couldn’t pass the means test? If your financial circumstances have changed, you might pass the means test now. Take it again. (Learn more in The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?)
Will You Qualify for a Chapter 7 Discharge?
Proceeding with Chapter 7 bankruptcy and receiving a bankruptcy discharge are two different things. Just because you pass the means test and have a right to voluntarily convert your Chapter 13 to a Chapter 7 bankruptcy case doesn’t mean that you’re entitled to a discharge of qualifying debt. Why? Because you’re entitled to receive a discharge only so often.
Specifically, if you received a Chapter 7 discharge within the previous eight years, you won’t qualify for another. But a recent discharge doesn’t mean that you won’t be allowed to convert—you will if you meet other requirements.
Here’s what happens in that situation (and most people won’t like it).
As with any Chapter 7 case, the bankruptcy trustee will sell your nonexempt property (property that isn’t protected by a bankruptcy exemption) and use the proceeds to pay creditors. When your case ends, the amount you owe will be less, but, since you won’t receive a discharge, you’ll still be required to pay any remaining balance on all debts.
Since it’s unlikely that the trustee will get top dollar for your property, and because the trustee takes a percentage off the top, most people would do better to liquidate their property and repay creditors on their own.
When the Court Might Force You to Convert
The bankruptcy court can order you to convert your case to Chapter 7 for cause (the court has a reason to do so). However, it’s unlikely that the court will force the conversion if you are doing everything that you can in good faith. For instance, if you miss a payment due to no fault of your own (perhaps you had unforeseen car repairs), or if you can’t put together a confirmable repayment plan despite your best efforts, in the absence of additional facts, it’s unlikely that the court will force a conversion. Instead, the court will simply dismiss your Chapter 13 case.
By contrast, if your actions suggest that you’re taking advantage of your creditors in some way or attempting to manipulate the system—for instance, by filing to stop a foreclosure sale with no intent to submit a viable repayment plan—then the court might force a conversion to Chapter 7 bankruptcy.
Filing Procedures for Converted Cases
Here’s the process involved in converting your case.
- The petition and schedules. In most courts, the bankruptcy petition and forms filed in your Chapter 13 case become a part of your converted Chapter 7 matter. However, you might have to take the means test and update your income and expenses, as well as list any debts you incurred after filing your Chapter 13 case (these can be discharged in your Chapter 7 case if they qualify—see Which Debts Are Discharged in Chapter 7 Bankruptcy?). You’ll have to file another form, too—the Statement of Intention for Individuals Filing Under Chapter 7 (this form tells the court what you plan to do with your secured debts.) Some courts require you to file a new set of schedules, even if nothing has changed.
- Creditor payment claims. The creditors’ Proofs of Claims, if already filed, carry over to your Chapter 7 case. If money is available for creditors (which will only be the case if the Chapter 7 trustee sells nonexempt property), the new creditors will be given time to file a Proof of Claim.
- The creditors’ meeting. You must attend another meeting of creditors, even if one was held in your Chapter 13 case.
- Exemptions. The court will determine your property exemptions as of the date you filed for Chapter 13 bankruptcy. Assets acquired after your initial filing won’t be at risk. (Learn about the property you can keep in Bankruptcy Exemptions by State.)