Converting Chapter 13 to Chapter 7 Bankruptcy Under the Law
After initially filing for bankruptcy under Chapter 13, a debtor might decide that they need to file under Chapter 7 instead. They might have filed under Chapter 13 to keep a specific asset, such as their home, and they ultimately might choose not to keep this asset. Or the bankruptcy court might force them to convert to Chapter 7 if they cannot keep up with their payments under the Chapter 13 repayment plan, although this is uncommon. You have a right to convert a Chapter 13 case to Chapter 7 as long as you are eligible for Chapter 7.
The main obstacle in converting to Chapter 7 is passing the means test either explicitly or implicitly. Even if a court does not require a debtor to actually pass the test, it likely will prevent them from converting to Chapter 7 if they have enough income to repay some of their debts. This is meant to avoid creating a loophole for debtors with substantial income and assets to file under Chapter 13 and then change to Chapter 7 to escape paying back more of their debts. Just because you could not pass the means test when you initially filed under Chapter 13, though, does not mean that you will not pass it now if your circumstances have changed.
Required Procedures for Conversion
Most of the bankruptcy forms that you filed for Chapter 13 can be transferred to your Chapter 7 proceeding. You will need to update some of the forms if your income, debts, and expenses have changed. (Debts that you incurred after filing under Chapter 13 can be included and discharged in the Chapter 7 proceeding if they are dischargeable.) Even if your finances have not changed, you may need to resubmit the same information in some states. Also, you will need to submit forms related to the means test and any secured debts.
Proofs of claims submitted by creditors will automatically transfer from the Chapter 13 proceeding to the Chapter 7 proceeding. Creditors may have an opportunity to submit new proofs of claims if more money becomes available for them upon the sale of non-exempt property. Any exemptions will use the same date as your initial Chapter 13 filing, and you can keep any property that you acquired after that date.
You will need to go through a new meeting of creditors, which may be different from the meeting in your Chapter 13 case.
As long as you act in good faith during your Chapter 13 bankruptcy, the court probably will not force you to convert to Chapter 7. If you cannot put together an acceptable repayment plan, or if you miss a payment for a valid reason, the court is more likely to dismiss your case than force you to convert. Situations in which a forced conversion may occur include when the court suspects abuse of the system or an effort to pay creditors less than the amounts to which they are entitled.
Getting a Discharge After a Conversion
If a debtor has received a discharge under Chapter 7 within the last eight years, they will not be able to get a discharge under that chapter again if they convert from Chapter 13. While this does not prevent them from converting to Chapter 7, it means that many of their debts will remain in effect after the bankruptcy ends. They will be reduced by the trustee selling off non-exempt property, but the debtor likely could get a better return from selling this property on their own. They also would not need to account for the trustee’s commission on the sale. Instead of converting to Chapter 7, they may prefer to leave the bankruptcy process, liquidate their property, and pay back their debts independently.
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