What Happens to Chapter 13 Plan Funds—and Other Property—if I Convert to Chapter 7 Bankruptcy?

It isn't unusual for someone's financial situation to change over the course of a three- to five-year repayment plan. When it occurs, many Chapter 13 filers are unable to continue making plan payments. A debtor in this situation, perhaps due to suffering a job loss, might ask the court to modify the Chapter 13 payment, request a hardship discharge, or ask the court to convert the case to a Chapter 7 bankruptcy.

If the conversion isn't an attempt to manipulate the system to the detriment of creditors—often called "bad faith"—a filer can convert a Chapter 13 to a Chapter 7 case at any time, assuming Chapter 7 eligibility. Learn more in Converting Your Bankruptcy Case From Chapter 13 to Chapter 7.

How Does Chapter 13 Work?

A Chapter 13 bankruptcy filing is often the only option available to people who make too much to qualify for a Chapter 7 bankruptcy (more below). It also works well when someone wants to:

• pay off nondischargeable debt (debt that doesn't go away in bankruptcy)
• keep nonexempt property (property that would normally be sold for the benefit of creditors), or
• catch up on an overdue house or car payment.

In Chapter 13 bankruptcy, you make regular Chapter 13 plan payments for three to five years to the bankruptcy trustee appointed to administer the case. In turn, the trustee disperses the funds to creditors. Sometimes, however, the filer can't continue funding the repayment plan due to a financial change and converts the case to a Chapter 7 bankruptcy.

What Happens to the Funds the Trustee Has After Converting Chapter 13 to Chapter 7?

If the Chapter 13 trustee holds any plan payments for your creditors, the funds will be returned to you. However, you might lose other assets because Chapter 7 bankruptcy is a liquidation chapter—meaning that the trustee sells property that you can't protect with a bankruptcy exemption. After the conversion, the Chapter 7 trustee can sell nonexempt property you owned when filing the Chapter 13 case that you couldn't protect with an exemption.

Converting a Chapter 7 to Chapter 13 Bankruptcy

Although unusual, you can also convert a Chapter 7 to a Chapter 13 case. This conversion usually happens when the filer's income is too high to pass the means test, indicating that there's sufficient income to repay creditors some amount through a Chapter 13 repayment plan. This conversion cannot occur without the debtor's consent. Learn more about Converting a Chapter 7 Bankruptcy to Chapter 13.

Money and Property: What Happens After You Convert a Bankruptcy Case

Filing for bankruptcy creates a "bankruptcy estate" in which all your assets and property rights are held. The bankruptcy chapter you file—or convert to—will determine what happens to the property in the bankruptcy estate.

• The Chapter 7 bankruptcy estate. The bankruptcy estate consists of all your property when you filed the petition (other than the property you can protect using a bankruptcy exemption and certain retirement accounts). The trustee sells nonexempt property for the benefit of your creditors.
• The Chapter 13 bankruptcy estate. The bankruptcy estate includes the property you had when you filed plus any property or earnings acquired after filing but before the case is closed, dismissed, or converted. The trustee doesn't sell nonexempt property in this chapter—you'll pay an amount equal to its value in your repayment plan. Learn more in Exemptions in Chapter 13 Bankruptcy.
• Bankruptcy estate property when converting from Chapter 13 to 7. The Chapter 7 estate will include all of the property you owned (and couldn't exempt) on the day you filed the original Chapter 13 that remains in your possession or control on the conversion date. It doesn't include income you earned after the filing date. A trustee who is holding plan funds that haven't yet been distributed to creditors must return the funds to you. (Harris v. Viegelahn, 135 S.Ct. 1829 (2015).)
• Bad faith bankruptcy estate exception. There's an exception if the court finds you converted your case in bad faith. In that situation, the bankruptcy estate will include all of your property on the day you filed the original Chapter 13 that remains in your possession or control on the date of conversion plus any property you acquired after you filed the Chapter 13 and before you convert it to a Chapter 7.