In Chapter 13 bankruptcy, you make regular 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.
If the Chapter 13 trustee is holding any plan payments for your creditors, the funds will be returned to you. However, because Chapter 7 bankruptcy is a liquidation chapter—meaning that the trustee sells property that you can’t protect with a bankruptcy exemption—you might lose other assets. The Chapter 7 trustee can sell nonexempt property that you owned when you filed the Chapter 13 case.
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:
But it isn’t unusual for someone’s financial situation to change over the course of a three- to five-year repayment plan. For instance, a debtor who suffers a job loss and can’t continue making the required monthly payment might ask the court to convert the case to a Chapter 7 bankruptcy or request a hardship discharge.
As long as the conversion isn’t an attempt to manipulate the system to the detriment of creditors—often referred to as “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.)
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.)
Filing for bankruptcy creates a “bankruptcy estate” in which all of your assets and property rights get held. The bankruptcy chapter you file—or convert to—will determine what happens to the property in the bankruptcy estate.