Converting a Chapter 13 to a Chapter 7 bankruptcy

Life happens to everyone, including those in a Chapter 13 repayment plan. Thankfully, the Bankruptcy Code provides a mechanism for changing (converting) your case from Chapter 13 to Chapter 7 bankruptcy if needed. Let’s take a look at what that entails exactly and what you should know about this affects your property and your debts.

Conversion Basics

Sometimes you may want to convert your Chapter 13 bankruptcy case to a Chapter 7 bankruptcy because your financial circumstances have changed. Maybe you can’t keep up with your monthly payments for your Chapter 13 plan due to a job loss, sickness, or higher than expected student loan payments. To determine if you can convert your case to a Chapter 7, you will first need to see if you qualify. Just because your financial situation has changed does not mean you will automatically be able to convert your Chapter 13 case to Chapter 7. 

Can anyone convert to Chapter 7? 

Not everyone can convert their bankruptcy case from a Chapter 13 to a Chapter 7. As mentioned above, you will need to be eligible for relief under Chapter 7. Individuals who have received a previous Chapter 7 discharge within the last 8 years will not be eligible to convert their case. Aside from being able to get a discharge, you will also need to show the court that you lack the necessary disposable income to pay your bills. You will need to amend your Schedule I to show your new income and your Schedule J to show your updated expenses. Don't confuse Schedules I and J with qualifying under the Means Test. Although you may need to qualify under the Means Test as well, you will also need to show the court that your household income is no longer sufficient to meet your reasonable living expenses. 

Aside from amended Schedules I and J, all you have to do to convert your Chapter 13 case to one under Chapter 7 is file a “Notice of Conversion” that provides notice to the court and your creditors about the change.  You will also be required to pay a one time $25 conversion fee. Typically, the notice to convert will be processed automatically and you won't have to attend any court hearing on the matter. 

What Happens After My Case is Converted?

After your Chapter 13 bankruptcy case is converted, you will have a new Chapter 7 trustee assigned to your case. The bankruptcy court will then schedule a new 341 meeting of creditors. The creditors’ meeting takes place about 30 days after the conversion of your case. 

The Chapter 7 bankruptcy process is much faster than the Chapter 13 bankruptcy process. The total process only lasts about four months. Most people who file Chapter 7 will only need to attend their 341 meeting. At the 341 meeting of creditors, the trustee will ask you questions about your petition and your amended schedules. While you don’t need to complete a whole new petition, you will need to make amendments to your schedules when converting your case to Chapter 7. The trustee will want to see that you can’t afford to pay back your debts and should no longer be in a repayment plan. After the meeting, you will receive your Chapter 7 bankruptcy discharge papers in the mail. The papers will typically arrive 90 days from the first meeting of creditors, eliminating all dischargeable debts. Once the trustee has completed their work on your case, the bankruptcy court will close your case. 

What to expect at the 341 Meeting

At the 341 meeting, you will meet with a bankruptcy trustee assigned to your new Chapter 7 case. The trustee will question you about your debts, income, and assets that you listed in your bankruptcy petition. The trustee will want to see your financial documents from the original filing date, not the date the case was converted. The trustee will want copies of your bank statements, pay stubs, and tax returns. The meeting typically only lasts 5-10 minutes. After the meeting is over the trustee will either close the meeting or hold the meeting open if he or she wants more information. 

What happens to new debt incurred after filing Chapter 13? 

Any debt incurred after filing Chapter 13 but before converting the case to one under bankruptcy Chapter 7 will be discharged in the converted case. If any creditor puts in a proof of claim in your Chapter 13 case, they will be carried over to your Chapter 7 case. These creditors will only be paid if the Chapter 7 trustee sells an asset that is nonexempt. You will need to make the proper updates to your bankruptcy schedules to ensure that all of your new creditors are listed. Make sure to file an amendment to Schedules D and E/F, and provide the court with the mailing addresses for each new creditor. Note, there is a $31 filing fee to make this amendment, so be sure to add all new creditors at once otherwise you will end up paying unnecessary additional fees. 

Keep in mind, that Chapter 13 filers are not allowed to incur new debt without court authorization. Some people may incur medical bills after their Chapter 13 has been filed. If this is your case, you can include it in your Chapter 7 bankruptcy. The Court does not allow filers to go out and incur a bunch of new debt after filing a Chapter 13 petition. If you decide to rack up more debt by opening new credit card accounts right before converting your case to a Chapter 7 this can be considered fraud. 

You will be required to file a Statement of Intention for any secured debts. This form tells the court what you plan to do with your secured debts. 

What happens to my property if my case is converted to Chapter 7? 

In Chapter 7 bankruptcy, all assets become part of the bankruptcy estate. Assets that are part of the bankruptcy estate after your case has been converted are all assets that are still in your possession as of the date of conversion. 

One exception to this rule is if the court finds the conversion was done in bad faith. If your case is converted in bad faith, the trustee can take assets acquired after you filed your bankruptcy and sell them to pay your creditors. For example, if you had a winning lottery ticket while in your Chapter 13 bankruptcy, and decided to convert your case so that you wouldn’t have to turn over the lottery winnings as extra income. If the court finds that you converted the case in bad faith, the court can pull the lottery winnings into the Chapter 7 bankruptcy estate even though it would not have been property of the estate had your case originally been filed as a Chapter 7. 

Property owned free and clear

Many individuals who file Chapter 7 bankruptcy can keep their assets as long as their property is protected under an exemption. Some of the most common exemptions are for homes, vehicles, and personal property. 

In a Chapter 7, assets that are not protected by an exemption can be seized by the bankruptcy trustee and sold to pay off your creditors. One exception to this is if your Chapter 13 case was previously confirmed and you already paid the value of the nonexempt assets to your unsecured creditors through the Chapter 13 trustee. 

Property securing a loan

If you have a secured debt, like a car loan, that is attached to collateral you will need to figure out how to handle this in your Chapter 7 bankruptcy. If the secured debt was being paid through your Chapter 13 plan payments, you’re probably behind on the payments to your secured creditor. If you are not current, you may not be able to negotiate a reaffirmation agreement with your lender. In a Chapter 7 bankruptcy, instead of allowing the lender to take your property, the reaffirmation agreement allows you to keep the property as long as you promise to repay the debt. Keep in mind that you will need to convince the lender and the court that they should extend a reaffirmation agreement to you by showing you can afford to make the payments despite the change of circumstances that caused you to convert  your case. Keep in mind that most lenders will need you to show that you are current with your payments thus if you are behind it may not be feasible to enter into a reaffirmation agreement unless the payments are brought current. 

Conclusion

If you are thinking about filing a Chapter 13 bankruptcy or have already done so, and are thinking about converting your case to a Chapter 7 or are worried that you may need to convert your case in the future, it is best to speak with a bankruptcy attorney who can help you. A bankruptcy attorney can go over your case and financial situation to determine if you would be eligible to file a Chapter 7 bankruptcy. Most bankruptcy lawyers give free consultations that you should take advantage of. Some law firms will even allow free consultations over the phone. It is important to speak with someone sooner than later to get on the right path of debt relief.