Bankruptcy refers to the legal proceeding which is initiated when an individual or business can no longer meet their financial obligations to creditors. There are different types of bankruptcy, all of which are governed under federal law. Once the bankruptcy process has been completed, the debtor is no longer legally liable for the debts they have incurred.
The bankruptcy court will enter a discharge order, releasing the debtor from their debts. The debtor then has a clean financial slate; however, the bankruptcy will remain on their credit report for up to ten years.
There are essentially two types of bankruptcy: reorganization, and liquidation. Chapter 13 bankruptcy refers to the reorganization type of bankruptcy. This option is generally available for debtors who have higher incomes and property that they wish to be protected from creditors seeking to levy those assets. The debtor is allowed to reorganize the debt and make payments that they can more easily afford.
Some debts may be discharged through this process, while other debts are required to be paid in full within the timeframe of the bankruptcy payment plan. Some of the different factors that can impact how the debt is reorganized or restructured include:
- The kind of debt the debtor wants included, as some debt cannot be discharged such as child support, student loans, taxes, etc.;
- The type of relationship the debtor and the creditor have in terms of the debt;
- The debtor’s ability to pay off the amounts owed within a reasonable time period; and
- The bankruptcy judge’s final determinations regarding the debt.
Chapter 7 bankruptcy refers to the liquidation type of bankruptcy. It allows a debtor to erase all debt that is legally capable of being discharged. However, there are specific Chapter 7 bankruptcy rules in place to determine who qualifies, how to file for bankruptcy, and what type of debt is actually eligible for discharge.
Some bankruptcy cases may be converted from a Chapter 13 status filing to a Chapter 7. Switching from Chapter 13 to Chapter 7 may be necessary if:
- The debtor’s personal financial situation has changed such that they can no longer keep up with Chapter 13 repayment plans; or
- The debtor originally filed under Chapter 13 because they wished to keep certain items of property, but now they no longer want to keep that specific property.
Generally speaking, converting a Chapter 13 to Chapter 7 can be requested at any time after the original Chapter 13 claim was filed. The process to do so is essentially the same as filing a fresh Chapter 7 claim. As such, all of the usual restrictions will apply when making the conversion. An example of this would be being required to wait at least eight years from the prior Chapter 7 bankruptcy filing.
What Is a Forced Conversion from Chapter 13 to Chapter 7?
In some bankruptcy cases, the bankruptcy court may actually require a debtor to convert a Chapter 13 claim to a Chapter 7 claim. This is known as forced conversion, and it is backed by a court order to do so. Failure to make the conversion could result in legal penalties for the debtor. Forced conversion can only be ordered when the court has good cause to do so. Some examples of good cause include, but may not be limited to:
- The debtor failed to create a Chapter 13 plan within the specified time frame;
- The debtor failed to keep up with their scheduled Chapter 13 payments; and/or
- The debtor was involved in some unreasonable delay which resulted in harm to the creditor(s).
It is important to note that it is unlikely that the bankruptcy court will force a conversion if the debtor is clearly doing everything within their abilities. An example of this would be missing a payment due to unforeseen circumstances, such as a medical emergency that could not be anticipated. However, if the debtor’s actions tell the bankruptcy court that they are taking advantage of their creditors in some way, they may force the conversion from Chapter 13 to Chapter 7.
What Is Needed to Switch from Chapter 13 to Chapter 7?
Chapter 7 bankruptcy has a number of requirements that debtors must meet before filing for Chapter 7. These requirements include the means test. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) prevents debtors with higher incomes from filing for Chapter 7 bankruptcy.
The means test checks your income in order to determine your eligibility to file for bankruptcy. Debtors must submit either a Form 22A for Chapter 7 proceedings, or a Form 22C for Chapter 13 proceedings. This form will be submitted to the bankruptcy court before they will hear the debtor’s case.
Courts do not agree as to whether the means test requirement applies to debtors who are converting to Chapter 7. Some courts maintain that the means test is only for debtors who initially file for Chapter 7.
In general, converting a Chapter 13 to a Chapter 7 can be requested at any time after the original Chapter 13 claim was filed. The process is essentially the same as filing a fresh Chapter 7 claim. As such, all of the usual restrictions will apply when making the conversion. This includes being required to wait at least eight years from the previous Chapter 7 bankruptcy filing, and fulfilling the means test if required as previously mentioned.
The following elements will need to be addressed when converting from Chapter 13 to Chapter 7:
- Petition and Schedule: A petition must be filed with the court. When making a conversion, the original Chapter 13 petition will typically carry over during the conversion process, although a new schedule may need to be created;
- Proof of Claims: The debtor will need to obtain a “Proofs of Claims”, which shows that the creditor has a valid claim on the debtor’s debt. This may also be carried over from the original Chapter 13 claim;
- Creditor Meeting: The debtor must attend another meeting with their creditor or creditors, even if a meeting was initially held during the Chapter 13 hearings; and
- Exemptions: Depending on the bankruptcy court’s jurisdiction, some courts use the date of the Chapter 13 filing to determine exemptions. Others will use the Chapter 7 conversion date.
Many of the requirements for Chapter 7 will automatically be fulfilled when the claim is converted from the Chapter 13 filing. However, a debtor may need to contact an attorney for assistance with the other requirements. An example of this would be how some of the paperwork that will be carried over could still need to be amended for adjustments to Chapter 7.
How Much Does It Cost to Switch from Chapter 13 to Chapter 7 Bankruptcy?
It is important to note that the costs associated from switching from a Chapter 13 to a Chapter 7 bankruptcy will be dependent on numerous factors, such as the costs of the trustee appointed by the court, court costs, and attorney fees to name a few.
When a bankruptcy is converted from Chapter 13 to Chapter 7 bankruptcy, a new bankruptcy trustee will be assigned by the court, and a new 341 meeting of the creditors must occur. What this means is there are various costs that will come with switching from Chapter 13 to Chapter 7. Because you must also attend a new meeting of the creditors, your attorney may also charge you an additional fee. However, you will not be required to file and pay for a new bankruptcy petition.
Do I Need a Lawyer for Help with a Bankruptcy Conversion?
Converting from Chapter 13 bankruptcy to Chapter 7 can quickly become complicated, and may differ from state to state. You should consult with a skilled and knowledgeable bankruptcy lawyer if you would like to pursue bankruptcy conversion, or if you are being forced to convert by your bankruptcy court.
An experienced bankruptcy attorney can explain your filing options to you, and can assist with all required forms and documents. Additionally, they will represent you in court as needed.