Filing for bankruptcy can offer a fresh start, but sometimes the financial situation of a debtor changes after filing. In such cases, converting from Chapter 7 to Chapter 13 bankruptcy may not only be possible but also beneficial.
The bankruptcy code allows for this conversion process, offering a path to keep valuable assets while developing a structured repayment plan for outstanding debts. Similarly, it is also possible to convert to Chapter 7 from Chapter 13 under certain circumstances, providing an alternative route for those who can no longer maintain their Chapter 13 repayment plans.
Key Takeaways
Conversion from Chapter 7 to Chapter 13 is strategic, not automatic. It allows debtors to retain valuable property and manage debts through a structured repayment plan, especially when financial circumstances improve after the initial Chapter 7 filing.
The bankruptcy court must approve the conversion. You must file the proper documentation, pay a fee, and submit updated financial information, all while demonstrating good faith in your decision to convert.
Legal guidance is essential. An experienced bankruptcy lawyer can help ensure the conversion aligns with your financial goals and complies with the bankruptcy code, avoiding delays or case dismissal.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy—often called liquidation—allows debtors to discharge most unsecured debt, such as medical bills and credit card debt, after the bankruptcy trustee sells off nonexempt assets to pay creditors. This route is typically reserved for individuals with limited disposable income who pass the means test, which compares their income to the state’s median income.
However, circumstances change. A job loss might be followed by new employment, or a debtor might inherit money or see a rise in income after the filing date. In such cases, staying in Chapter 7 may no longer be ideal—or even allowed.
Why Convert from Chapter 7 to Chapter 13?
If your financial circumstances improve after filing a Chapter 7 bankruptcy, you may consider converting to Chapter 13 to avoid losing secured property like your home or car loan collateral. Chapter 13 gives debtors time, typically 3 to 5 years, to pay creditors through manageable plan payments while keeping personal property that would otherwise be sold in a Chapter 7 bankruptcy estate.
Many people convert from Chapter 7 to Chapter 13 due to improved financial circumstances.
Here are some reasons people consider this conversion:
You originally filed Chapter 7, but now have more money to contribute to your debts.
You want to protect nonexempt property like valuable household goods or a second car.
You’ve incurred debts after filing and need to address new creditors in a Chapter 13 plan.
You want to catch up on future payments, like mortgage arrears, or avoid foreclosure.
You are concerned about a forced conversion due to failing the means test after a change in income.
Qualifying for Chapter 13 Bankruptcy: What You Need to Know
To qualify for Chapter 13 bankruptcy, individuals must demonstrate a steady income that allows them to make regular plan payments. The means test is a critical component in this determination, assessing whether an individual has sufficient disposable income to repay debts through a Chapter 13 plan.
This test compares the debtor’s income to the state’s median income, ensuring that only those with the financial capability to make plan payments are eligible.
However, financial circumstances can change unexpectedly. Job loss, medical emergencies, or other significant life events may render a debtor unable to afford their Chapter 13 plan payments.
In such situations, converting to Chapter 7 bankruptcy may become a viable option. The bankruptcy code permits this conversion, but it requires passing the means test and meeting other qualifying criteria. This ensures that the conversion is justified and aligns with the debtor’s current financial situation.
How Does the Conversion Process Work?
To convert a Chapter 7 to a Chapter 13 case, the debtor must file a notice of conversion with the bankruptcy court, pay a conversion fee, and submit updated financial documents. You will also need to attend a creditors’ meeting under your new Chapter 13 bankruptcy, and a new trustee will be assigned.
Additionally, a new meeting of creditors (341 meeting) is required when converting from Chapter 7 to Chapter 13.
Your new case will include:
A revised bankruptcy petition reflecting your updated financial situation.
A proposed repayment plan based on your disposable income and the fair market value of your secured debts and nonexempt assets.
Required debtor education courses.
The court will assess whether the conversion is in good faith. Bad faith, such as converting simply to delay foreclosure without intent to pay, can lead to dismissal.
Effects of Conversion on Property
When converting from Chapter 13 to Chapter 7, the impact on property can be substantial. Non-exempt assets, which are not protected by bankruptcy exemptions, may be sold by the bankruptcy trustee to pay unsecured creditors. This includes items such as valuable household goods, second vehicles, or other personal property that exceeds exemption limits.
However, debtors may retain certain properties, such as their home or car, if they are current on their payments and the property is exempt under bankruptcy laws. The conversion process also affects secured debts, like car loans or mortgages.
Understanding how these changes will impact your property and debts is crucial for making an informed decision about conversion. Consulting with an experienced bankruptcy lawyer can help clarify these effects and guide you through the process. Contact SB Legal for a free consultation today!
Key Considerations Before Converting
Credit Report Impact: Both the original Chapter 7 and the converted case under Chapter 13 will appear on your credit report.
Secured Debts: Chapter 13 allows you to restructure payments and potentially reduce interest on items like car loans. The lender plays a crucial role in negotiating terms or deciding how to handle debt obligations during the bankruptcy process.
Unsecured Creditors: They may receive a portion of what they’re owed through your plan payments.
Non-Exempt Assets: If you have nonexempt property you’d prefer to keep, Chapter 13 may be the only way to protect it.
Bankruptcy Process: The bankruptcy case will continue under the new chapter, but some deadlines and forms will reset.
Pros and Cons of Converting
Converting from Chapter 13 to Chapter 7 bankruptcy offers both advantages and disadvantages. One of the primary benefits is the potential for a fresh start, as Chapter 7 can eliminate debts more quickly than Chapter 13. This can provide immediate relief from financial burdens and allow individuals to rebuild their financial lives.
However, there are also significant drawbacks. Converting to Chapter 7 may result in the loss of non-exempt assets, as the bankruptcy trustee may sell these items to pay creditors. Additionally, individuals may not be able to keep certain properties, depending on their exemption status and current payment status. The conversion process itself can be complex, requiring additional paperwork and legal guidance.
It’s essential to weigh these pros and cons carefully, considering factors such as your financial circumstances, debts incurred, and the potential impact on your credit report. An experienced bankruptcy lawyer can help you navigate the conversion process, ensuring that you make an informed decision that aligns with your financial goals.
Can You Convert from Chapter 13 to Chapter 7?
Yes, conversion works both ways. You can convert from Chapter 13 to Chapter 7 if you can no longer afford the plan payments or experience a financial downturn.
Individuals might convert their Chapter 13 bankruptcy to Chapter 7 due to changes in personal income, legal requirements, and the potential advantages and challenges of making this conversion. Courts require a valid reason for this switch, and you must still pass the means test or qualify based on other financial circumstances.
Conclusion
Life changes, and so can your bankruptcy path. Whether you need to protect your assets, address secured debts, or create a long-term debt relief strategy, converting from Chapter 7 to Chapter 13 might be your best next step. With proper professional help, the bankruptcy process can become a tool to regain control over your financial future and give you the second chance you deserve.
Frequently Asked Questions
Can I convert to Chapter 13 if I’ve already received a discharge in Chapter 7?
No, once your debts are discharged under Chapter 7, the case is closed, and a conversion is no longer possible. Conversions must be requested before the discharge is granted by the court.
Will converting to Chapter 13 restart the timeline for how long bankruptcy stays on my credit report?
No, the original Chapter 7 filing date remains on your credit report, and the time limits (typically 10 years for Chapter 7) are calculated from that date, even after conversion.
Do I need to re-complete the credit counseling or debtor education courses when I convert?
Not necessarily. If you have already completed the required courses for Chapter 7 and they meet the Chapter 13 requirements, you may not need to retake them. However, this depends on your jurisdiction and the timing of your completion.
