Most people, if mulling bankruptcy and given the opportunity, will file for a Chapter 7 bankruptcy. That’s because a Chapter 7 liquidation will allow a debtor to shed almost all unsecured debts (credit cards, medical bills, etc.). While the process can be arduous, debtors ultimately emerge debt-free and ready to step out on fresh financial footing.
However, the problem is that bankruptcy rules significantly tightened in 2005, constricting the standards for who qualified for a Chapter 7 liquidation over a Chapter 13 repayment plan. After the passage of that law, more people were forced to file for a Chapter 13 because they didn’t pass the qualifying test for a Chapter 7.
It is possible, though, to convert from a Chapter 13 to a Chapter 7 proceeding if it turns out at some point during the process you do qualify. In some situations, the decision is voluntary and the courts will force you to do this. In other cases, it is the debtor who initiates the move.
Whatever the scenario, having an experienced bankruptcy lawyer to help guide you through the process is essential.
The reasons why someone may want to convert to a Chapter 7 are varied. To begin with, financial circumstances may have changed to the point that you are no longer able to keep up with your repayment plan.
Alternatively, it could be that perhaps you filed for Chapter 13 in the first place to preserve certain property. (While every state has bankruptcy exemptions for property that you will be allowed to keep in a Chapter 7 filing, the rest of it is likely to be subject to liquidation to repay creditors.) But now, perhaps you don’t want to keep that property anymore.
For example, let’s say you filed for Chapter 13 protection in large part to save your home from foreclosure. However, now you believe it is simply no longer worth keeping. Despite loan modifications and other measures, you remain too deeply underwater to make it worthwhile. Converting to a Chapter 7 and allowing the home to enter foreclosure may be an alternative you’ll want to explore.
As far as why the court might force you into a Chapter 7, it could be that you have failed to make your Chapter 13 payments on time or that there is an unreasonable delay that has caused substantial harm to your creditors.
You have the right to initiate this conversion to a Chapter 7 at any time during the Chapter 13 proceeding – even if you are several years into the repayment plan. There is one major exception: If you have received a Chapter 7 bankruptcy discharge at any point within the last eight years.
Additionally, the trustee in your case may still want to make sure that you qualify for a Chapter 7. The primary hurdle is the means test, which is a formulaic analysis of your income and expenses.
Whether the means test is required for conversions remains a somewhat open question. Some court rulings (In re Chapman, 2011, Bankruptcy Appellate Panel for the Eighth Circuit – among others) have ruled that debtors still have to pass the means test in order to qualify for relief via Chapter 7. However, there have been a number of other rulings that have held that the means test isn’t necessary in conversions.
It will be up to the judge in the district where you file to determine whether you’ll have to pass this test first.
Contact the Schwartz Bankruptcy Law Center at 866-270-4495 for a free and confidential consultation to discuss your Louisville bankruptcy.
Can I foreclose on a home in Chapter 13 bankruptcy? Dec. 10, 2013, By Justin Harelik, Bankrate.com
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Concealing Assets May Result in Dismissal of Bankruptcy Case, Dec. 23, 2013, Louisville Bankruptcy Lawyer Blog