There are instances where someone who files Chapter 13 bankruptcy should or must convert to a Chapter 7, and the bankruptcy process allows for this. This article explains why converting a Chapter 13 to a Chapter 7 happens and how.
If you are contemplating either Chapter 13 or Chapter 7 bankruptcy, give our experienced Philadelphia bankruptcy lawyers a call. We assess your particular financial situation and advise you as to your options – free of charge!
What Is Chapter 13 Bankruptcy?
The primary feature of Chapter 13 bankruptcy is your three- or five-year repayment plan, through which you can catch up with past-due debt such as:
- Mortgage payments
- Car loan payments
- Car lease payments
- Child support arrears
- Spousal support arrears
- Student loans
- Income taxes
- Other taxes
- Government fines or fees
You can also file Chapter 13 to strip off second mortgages as unsecured debt and get that debt discharged, and cram down car loans to current retail value at prime plus 1-3% interest and own the car at the end of your plan. If you are at the end of a car lease, want to keep the car, but cannot afford to pay the end-of-lease balloon payment, you can pay the balloon payment off through your Chapter 13 plan and own the car when your plan is fully paid.
How to Qualify for Chapter 13
To qualify to file Chapter 13, you must have steady income and enough disposable income to fund your plan. “Disposable income” is income that is in excess of the money you need to pay your monthly expenses.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a four to six month process during which you disclose your income, assets, expenses, and debts, and you are discharged of unsecured debt you cannot afford to pay. “Discharged debts” are debts that you are no longer personally responsible for paying.
People who file Chapter 7 often have loans, credit card debt or medical bills they cannot pay. People also use Chapter 7 to legally surrender unaffordable collateral such as real property or a car. The underlying debt gets discharged.
How to Qualify for Chapter 7
There is an income limit to file Chapter 7 bankruptcy. In order to file Chapter 7 bankruptcy, you must pass the “means test,” which compares your income minus qualifying expenses to the state median income for a family of your size. If your income is less than the state median income, you qualify to file Chapter 7 bankruptcy.
Congress put the means test in place to prevent abuse of the Chapter 7 process by those who earn enough income to pay back at least a portion of the debt they owe.
When Can You Convert from Chapter 13 to Chapter 7?
You can convert from Chapter 13 to Chapter 7 at any time if you no longer have the income to fund your Chapter 13 plan. This can happen if your expenses unexpectedly increase or if your income unexpectedly decreases.
Note that conversion to Chapter 7 is available only to Chapter 13 debtors who have not received a bankruptcy discharge within the previous eight years. Also, you should be able to pass the means test in order to convert from Chapter 13 bankruptcy to Chapter 7 bankruptcy.
How to Convert Bankruptcy Types
Some bankruptcy courts require you to file a motion to convert, while others have forms for this purpose, such as a “Notice of Conversion.” You will also pay a conversion fee.
In most instances you need to file amended Schedules showing the reason you need to convert to Chapter 7, whether it be an increase in expenses or a decrease in income. You must also file a Statement of Intention setting forth your intent as to your secured debt such as your home or car.
What Happens When You Convert from Chapter 13 to Chapter 7?
The court typically grants your motion to convert automatically, without a hearing, as long as the above conditions are met and there are no objections from creditors or from the Trustee. You will stop making plan payments, and your case then proceeds as a Chapter 7. You will attend the 341(a) Meeting of Creditors, complete the Financial Management Course and do anything else that the trustee asks.
Once the date for creditors to object to discharge has passed and no creditor filed an objection, the court enters a discharge order in your case and your case closes.
Bear in mind that at this point, the automatic stay is lifted and creditors who were not discharged can take action to collect. This means that if you did not reaffirm your secured debts and are not paying them, your lenders can repossess your car or take steps to foreclose on your home and evict you.
When Might the Court Force You to Convert to Chapter 7?
If a Chapter 13 debtor is habitually late or in default in making plan payments, the Trustee may move to convert the case to Chapter 7. However, if the debtor has enough income to make plan payments but is simply not making them, the Court may not allow a Chapter 7 conversion. If the Court finds that the debtor is acting in bad faith in refusing to make plan payments when they can afford to do so, the Court dismisses their case entirely.
How Does a Bankruptcy Lawyer Help You Convert Bankruptcy Types?
Choosing which type of bankruptcy to file and whether conversion is necessary requires knowledge of the legal and financial ramifications of each option. Let a top bankruptcy lawyer like David M. Offen, Esq. help you assess your situation and your goals and guide you in whichever process best helps you reach those goals.
The Philadelphia bankruptcy attorneys at The Law Offices of David M. Offen have helped thousands of clients get a fresh financial start. We can help you too. Call us today for your free consultation.