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How To Change From a Chapter 13 to a Chapter 7

Can you change a chapter 13 to a chapter 7 once the chapter 13 has already started? Debtors with secured possessions such as a home, car or professional tools will probably want to save their secured assets if at all possible. For many people in debt, the only viable way to do that is to file a Chapter 13 bankruptcy.

  1. The Reasons Debtors Try to Convert to a Chapter 7 Voluntarily
  2. Forced Conversions by the Bankruptcy Court
  3. What Restrictions are There on Conversion?
  4. The means test problem
  5. How does the conversion take place

In Chapter 13, the debtor can protect his/her secured property by agreeing to pay the monthly payments and also submitting a plan in bankruptcy.

The chapter 13 plan will confirm the debtor’s intent to pay the arrears on any secured loans over a three to five year period. The plan will also provide for some amount of payment to unsecured creditors.

Debtors who fail the means test will also be forced to file a Chapter 13 bankruptcy. The means test compares the debtor’s income to the income of others who are similarly situated by family size and by geographical location. Debtors who fail the standard means test (which uses a simple comparison of incomes to a standard median income) may be able to pass the means test if they can show and prove unusual circumstances.

After filing the Chapter 13 bankruptcy, it may become clear that the Chapter 13 plan will not work. The debtor simply may not be able to keep up the monthly payments, the arrearage payments and continue paying something to the unsecured creditors.

When the debtor cannot make the Chapter 13 payments, the debtor may ask the Bankruptcy Court to convert the case to a Chapter 7 case. The Bankruptcy Court may also force the conversion from a Chapter 13 to a Chapter 7 if the debtor falls behind on the payments to the bankruptcy trustee. The conversion to a Chapter 7 is not automatic. The Bankruptcy Court decides each conversion case on a case by case basis.

The reasons debtors try to convert to a chapter 7 voluntarily

A debtor’s finances may change. Normally this means that a debtor loses his or her job or the debtor’s income is significantly reduced. The reduction may be work related and it can also be for medical or other extraneous reasons.

If you’re in troubled debt, you may decide there is no reason to keep the house, car, tools or other secured assets. The reasons to sacrifice the secured assets, other than financial, can include an opportunity to stay with relatives, loss of value of the asset(s), an accident to the property or other reasons.

Forced conversions by the bankruptcy court

The Bankruptcy Court, usually on the request of the Trustee in Bankruptcy, may force a conversion. Typical reasons for forcing the debtor to switch include the failure of the debtor to file the Chapter 13 plan when it is due, and the failure to make timely payments under the Chapter 13 plan.

What restrictions are there on conversion?

Many applicants can convert to a Chapter 7. There are some restrictions. The first restriction is that the debtor cannot convert to a Chapter 7 if the debtor received a Chapter 7 discharge within the prior eight years.

The means test problem

The new bankruptcy law, enacted in 2005, wanted to make sure debtors who had a reasonable ability to pay off their debts did make a viable effort to pay their creditors. As mentioned, there is now a means test which looks to see if the debtor’s income and expenses are too high. There is some question as to whether a Chapter 13 debtor who has failed to meet the Chapter 13 plan requirements needs to pass the means test again. Different bankruptcy jurisdictions seem to have different answers. This means it may depend on which state or federal bankruptcy district the debtor resided.

Even if a jurisdiction says the debtor has to pass the means test, the test that will be used is the one that applies at the time of the conversion, not the original test. For example, a debtor may have filed a Chapter 13 bankruptcy on January 1, 2014 because his or her income was over $60,000 and $60,000 was above the medium average for the debtor’s family size and location.

If, the debtor’s income is then cut in half, so that on August 1, 2015 his or her income is only $30,000, then the Bankruptcy Court will use the means test for the August 1, 2015 date. If $30,000 is below the medium for the debtor’s family size and location, then the debtor will pass the means test. In turn, the debtor will be able to convert to a Chapter 7.

Alternatively, if the debtor’s income stayed at $60,000, then the debtor would not be able to convert to a Chapter 7 with one exception. The figures the Bankruptcy Court uses for means testing do change on occasion to account for inflation and other factors. If the mean for Chapter 7 was move up to $61,000 before August 1, 2015, then the debtor would pass the means test and could convert to a Chapter 7.

How does the conversion take place

In most cases, the paperwork is the same unless the debtor’s financial situation changed. If the debtor’s income changes or the debtor incurred new debts, then amended bankruptcy schedules may be required. The debtor will also have to file a new Statement of Intention to explain what will happen to the secured debts. Unless the debtor can reaffirm the debts, with the permission of the creditor and the Bankruptcy court, the debtor will have to give his or her secured possessions to the Bankruptcy trustee.

There will normally be another meeting of creditors even if the debtor had a Chapter 13 meeting. The issues of the debtor’s exemptions will have to be reviewed. Often a Chapter 13 debtor will not claim exemptions because the Plan saves the key items.

When considering the exemptions, the Bankruptcy Court will have to decide which date, the original filing date or the conversion date, is used to value the exemptions.

Lastly, non-dischargeable debts will also have to be addressed.