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.
Most consumers filing for bankruptcy file a Chapter 7 or Chapter 13 case. Many people who choose to file a Chapter 13 bankruptcy case are facing foreclosure because they’re behind on mortgage payments or they’re facing repossession because they’re behind on car loan payments. Chapter 13 allows these filers to “reorganize” their loans and other debts and repay them over 3-5 years.
That means Chapter 13 filers are dealing with their bankruptcy and repayment plan for several years — a longer commitment than a Chapter 7, which generally brings debt relief and a fresh start in three to four months. But if you think that you picked the wrong type of bankruptcy or your financial situation changes, you can convert a Chapter 13 case to a Chapter 7 case.
Please note that Upsolve's free tool cannot be used to convert from one chapter to another.
Pros and Cons of Converting From Chapter 13 to Chapter 7
Each bankruptcy chapter has its benefits as well as its limitations. So there are advantages and disadvantages to converting your bankruptcy case from a Chapter 13 to a Chapter 7.
One advantage of converting a Chapter 13 to a Chapter 7 is that you’ll reduce the length of time that you’re in bankruptcy. You’ll remain protected by the automatic stay, but you won’t have to make Chapter 13 payments each month for three to five years. If you convert your case, you don’t have to start from scratch. In fact, your assets and debts relate back to the original date you filed Chapter 13. Perhaps the greatest advantage is that you can still discharge most of your debts like credit card debt and finish your bankruptcy in three to four months.
There are also disadvantages to converting your case. If your financial situation changes and you don’t have enough income to fund your Chapter 13 so you have to convert to a Chapter 7, you may have to surrender important assets like your home or car. If you file Chapter 13 to save your home or car, this works against that goal. Also, a Chapter 7 bankruptcy stays on your credit report longer than a Chapter 13.
A potential disadvantage is that the Chapter 7 case won’t provide the “super discharge” provided by a Chapter 13 case. A Chapter 13 discharge is known as a “super discharge” because it eliminates certain debts that can’t be discharged in a Chapter 7 case. But you’ll still be able to discharge unsecured debt like credit cards and medical bills.
Yet another disadvantage is that a new trustee will be assigned to your case and you’ll have to restart the bankruptcy process of submitting documents to their office and attending another meeting of creditors.
How To Change From Chapter 13 to Chapter 7
The Bankruptcy Code states you can convert a Chapter 13 case to a Chapter 7 case “at any time.” You may want to consult with a bankruptcy lawyer to make sure that converting your case is your best option.
In most cases, you simply file a “notice of conversion” and pay the conversion fee. The court doesn’t usually require a hearing, and the conversion can be completed in a very short time. The conversion fee is $25, which is the difference between the Chapter 7 filing fee ($$338) and the Chapter 13 filing fee ($313).
Can Anyone Convert From Chapter 13 to Chapter 7?
Federal bankruptcy law limits how often you can file bankruptcy. To convert a case from Chapter 13 to Chapter 7, you must be eligible for a discharge under Chapter 7 bankruptcy rules. If you’ve filed a Chapter 7 case in the last eight years andreceived a discharge, you’re not eligible for a discharge until the eight years pass.
If you’ve converted your case previously, you’ll need approval from the bankruptcy court to convert it again. This is not as simple as filing a notice of conversion.
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When Does Conversion From Chapter 13 to Chapter 7 Typically Happen?
Federal law says that a bankruptcy filer can convert a case from Chapter 13 to Chapter 7 “at any time.”
The most typical reason filers convert their cases is because they’ve experienced a change in their financial circumstances. A Chapter 13 case requires filers to have regular income to make monthly payments. You'll have to show that you have a steady source of disposable income to be approved for Chapter 13. But sometimes your financial situation changes because you lose your job, have an accident or medical emergency, or another unexpected event occurs after you file a Chapter 13 case.
For a Chapter 13 case to succeed, you must fund your plan. This means making plan payments for the entire repayment plan period. If you can no longer fund the Chapter 13 plan, it may be in your best interest to convert it to a Chapter 7.
What Happens to Debts Incurred After Filing the Chapter 13 Case?
Under the Bankruptcy Code, if you incur new debt through no fault of your own after you file a Chapter 13 but beforeyou convert it to a Chapter 7 case, the debts are treated as though they are pre-petition debts. This means that they’re discharged in the Chapter 7 case after conversion. As a result, there is generally no need to dismiss your case and start over to deal with post-petition debt from unexpected medical bills or other unforeseen circumstances.
That said, you do need to get court approval before incurring any new debts like a home or car while in a Chapter 13. This is to make sure you’ll still be able to make the plan payment in addition to the new debt repayment you’re taking on.
What Happens After a Case Is Converted to Chapter 7?
After the conversion of a case, your date of filing remains the same as the Chapter 13 filing. But you’ll have to attend another meeting of creditors with your new trustee. Also, the court sets new deadlines for objections by creditors. The Chapter 7 trustee will review your non-exempt property and decide if you have any assets that can be sold to benefit your creditors.
What Forms Do I Need To File or Update?
You won’t have to refile most of the schedules, statements, and other documents in your case after conversion. You must give the court notice of any change in circumstances by filing new or amended forms. The following is a summary of these forms:
Statement of Intention: Since this form isn’t required in Chapter 13 cases, this is the first new form that you’ll have to file. You’re required to file this statement for each one of your assets that is collateral for a secured debt. This shows if you intend to keep or surrender the property. It also shows if you’re willing to redeem the property or reaffirm the debt.
Schedule I: This schedule lists your income. If the main reason that you’re converting your case is because of a reduction of income, you’ll need to amend this schedule.
Schedule J: This schedule lists your expenses. Converting a case usually requires submitting updated expenses to the court to illustrate how your new reduced income level is insufficient to pay your living expenses and fund a Chapter 13 plan.
Schedule D/E/F: These schedules list your debts. If you have any pre-petition creditors that you forgot to list in your Chapter 13 case or have to add new post-petition debts, you must amend these schedules and your creditor matrix, also known as your master mailing list. It costs $32 every time that you amend this schedule. It’s not charged per creditor.
Current Statement of Monthly Income: You may or may not need to file an updated means test upon conversion. That depends on the law in your bankruptcy district.
What Should I Expect at the New 341 Meeting?
Many aspects of your case like your schedules, statements, and other forms will relate back to the Chapter 13 filing date. But you’re required to attend another 341 meeting with a new trustee. This meeting is similar to the meeting that you had with the Chapter 13 trustee.
When Will I Get My Discharge if I Convert to Chapter 7 Bankruptcy?
When you convert your case, the court resets all deadlines. The new 341 meeting restarts the deadline for creditors to object to your bankruptcy discharge. Typically, the court enters a discharge 60 days after the period for creditors’ objections expires. The case remains open until the trustee completes any other required case administration.
What Happens to My Property if I Convert From Chapter 13 to Chapter 7?
When you file a bankruptcy case, all your assets become part of your bankruptcy estate. But that doesn’t mean you’re at risk of losing everything. Some — or in many cases, all — of your property will be protected by bankruptcy exemptions. Any exempt property you own is protected from the trustee and from the claims of unsecured creditors.
Property and Exemptions in a Converted Case
Because the filing date remains the same, the bankruptcy estate remains the same. This means that whatever property you owned when you filed your Chapter 13 case is now part of your Chapter 7 bankruptcy estate. This also means that all exemptions on any property that you took in the Chapter 13 remain in effect.
If you didn’t have any non-exempt property when you filed your Chapter 13 case, there’s generally no non-exempt property in the converted case. If you have non-exempt assets, the new Chapter 7 trustee may sell any non-exempt property to help repay your creditors for the debts you owe. The good news is that as long as you didn’t convert your case in “bad faith” (basically, to hide something from creditors), any property you obtained after the original filing date isn’t at risk of being sold by the trustee.
Property That Is Securing a Debt
You must deal with any property that’s collateral for a secured debt as indicated on your statement of intention. For example, if you have a car loan, you can redeem the property by negotiating with your lender to buy it. You can also surrender the property and have the loan debt discharged as part of the bankruptcy.
There’s also a third option that may or may not be possible: reaffirming the loan. If you have a car loan you’ve reorganized under Chapter 13, it’s not uncommon to be behind on payments because the trustee follows their own payment schedule rather than the original creditor’s. This may delay your car creditor getting paid, which can delay or even complicate reaffirmation of the car loan in the converted Chapter 7 case. The car lender will likely ask the court to lift the automatic stay to proceed with repossession after the case is converted.
Is There Anything Else I Should Know About Converting to Chapter 7?
Chapter 13 cases are complicated and require a financial commitment of up to five years. Each person’s circumstances are different so it may prove helpful to get some legal advice. The best way to learn about Chapter 13 is to consult a bankruptcy attorney. Most offer free consultations, so there’s no cost to you to get more familiar with your options.
If you file a Chapter 13 case, you don’t have to stay in it if your circumstances change. You have a right under federal law to convert your case to Chapter 7. You also have the right to dismiss your case in most circumstances. As long as you’re eligible to receive a discharge under Chapter 7, you can convert your case at any time. The discharge will occur approximately 90 days after you convert your case. This is the same timeframe as in a regularly filed Chapter 7 case.