Converting Your Bankruptcy Case From Chapter 13 to Chapter 7

Chapter 13 debtors can switch or "convert" to Chapter 7 if they qualify for a Chapter 7 discharge and are willing to lose property not covered by a bankruptcy exemption. Conversions from Chapter 13 commonly occur when an income loss prevents the filer from making their Chapter 13 plan payments, and a modification isn't possible. A successful conversion allows the filer to erase qualifying debts in as little as four months.

Before Converting to Chapter 7: Explore Your Options

Before you convert your case from Chapter 13 to Chapter 7, you'll likely want to explore other options.

Modifying Your Chapter 13 Payment

The most common approach is to reduce the payment to a more affordable amount by filing a Chapter 13 modification motion. However, getting a modification approved can be challenging.

You must still follow the Chapter 13 payment rules, so you can only reduce the payment by the amount paid to nonpriority unsecured debts, like credit card balances and medical bills. If you're like most, and pay only a fraction of these balances, reducing that part of the plan payment to zero might not be enough to make the payment affordable.

You can't reduce the amount you pay toward priority debts like child support and tax debt, and you must continue repaying mortgage and car loan arrearages unless you're willing to let the house or car go back to the bank. If most of your Chapter 13 payment is made up of required amounts, modification won't be the answer.

Will You Lose Property in Chapter 7?

The most common issue presented in a Chapter 13 to 7 conversion is the risk of losing property you were hoping to protect when you filed for Chapter 13. You'll need to check whether you can protect your property with bankruptcy exemptions.

If you can't, it might be worthwhile to walk away from bankruptcy altogether. This might be the best option if you can sell the property for more than the bankruptcy trustee would, and negotiate with creditors directly.

Tip. Consider checking whether you'd qualify for a Chapter 13 hardship discharge. If you don't have nonexempt property, or you've paid unsecured creditors an amount equaling it (the amount you'd be required to pay in Chapter 7), you might qualify for this streamlined approach.

Chapter 13 to Chapter 7 Conversion Requirements

Once you determine that switching to Chapter 7 is the best option, you'll need to clear an eligibility hurdle by passing the Chapter 7 means test.

Passing the Chapter 7 Means Test

The means test examines your income and expenses to determine whether you can afford to pay some debts under a Chapter 13 plan. If you can, you won't qualify for Chapter 7. However, many people convert due to income reductions or job losses, so qualifying isn't usually a problem.

Even though some courts don't require debtors to complete the means test before converting from Chapter 13 to Chapter 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. But again, this is unlikely to occur if you explored modification and determined you weren't eligible.

The Eight-Year Discharge Rule

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. (11 U.S.C. § 727(a)(8).)

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'd need 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.

Converting Without Discharge Eligibility

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 primary benefit would be not needing to sell your property yourself. Instead, the trustee would sell any "nonexempt" property you can't protect with a bankruptcy exemption and use the proceeds to pay creditors. (11 U.S.C. § 522.)

The payments would reduce the amount owed to those creditors. However, you'd still be required to pay the remaining balances when your Chapter 7 case ended. None of your debt would get erased.

However, most people don't find this helpful because, as discussed above, you'd likely sell your property for more and avoid the bankruptcy trustee's service fee altogether. Most would choose to avoid Chapter 7, sell property, and repay creditors on their own.

When Courts Force Chapter 13 to Chapter 7 Conversion

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 that the bankruptcy court will approve despite your best efforts. Absent any facts indicating wrongdoing, the court would 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.

The bankruptcy court would be more inclined to convert a case involuntarily if a debtor were manipulating the system to avoid paying creditors.

How to Convert Chapter 13 to Chapter 7 Bankruptcy

Here's what you can expect after converting your case.

Required Bankruptcy Forms and Paperwork

In most courts, the bankruptcy petition and forms filed in your Chapter 13 case become a part of your converted Chapter 7 matter. However, 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. If you own your house, you'll want to learn more about filing for Chapter 7 with a home.

Attending the Chapter 7 Creditors Meeting

You must attend another meeting of creditors, even if you attended one in your Chapter 13 case.

How Bankruptcy Exemptions Work After Conversion

In most cases, the court will determine your property exemptions as of the date you filed for Chapter 13 bankruptcy. (11 U.S.C. § 522(b).) However, a creditor might object to this date if you're discharging debts incurred after the initial Chapter 13 filing.

Filing Creditor Claims After Conversion

Existing creditors' proofs of claim—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 debtor education course if you hadn't already, before you'd be entitled to a Chapter 7 discharge. (11 U.S.C. § 727.)

Should You Convert to Chapter 7? When to Consult a Lawyer

If you want to explore converting from Chapter 13 to Chapter 7, seek assistance from a local bankruptcy lawyer. An attorney can check whether your income is low enough to qualify for Chapter 7, verify that you haven't received a Chapter 7 discharge in eight years, and explain whether you'll keep all of your assets or if there's a chance of property loss.