Especially in these fast-changing economic times, what was one person’s financial situation today may look different tomorrow.
This extends to the bankruptcy process, especially if someone has started in one particular Chapter and the court deems it’s no longer the right fit for the debtor.
Why Converting a Bankruptcy Might Be The Right Move
If a debtor initially filed for a Chapter 13 bankruptcy, he or she was looking to pay off debts over time and retain certain assets (like a home or vehicle). If that person doesn’t want to or cannot afford to hold onto those assets anymore, converting to a Chapter 7 bankruptcy might be a more viable option.
How to Qualify for a Chapter 7 Conversion
First, the court will put the debtor through a means test to see if he or she has the resources to pay through a Chapter 13 plan. The means test compares a debtor’s average monthly income for the six months before filing bankruptcy against the median income of the filing state while taking into account personal expenses and the national and local standards for certain living expenses. Essentially, the test determines whether a debtor has disposable income available to pay creditors or if the debtor cannot meet those obligations. In most cases, if the person does meet the Chapter 13 thresholds, the court will keep that bankruptcy as planned rather than start a conversion. There are potentially different stipulations for high-income filers, and, as expected, every individual case is different in terms of available resources and assets to pay back debts.
An Overview of the Conversion Process
If a conversion has been deemed the right move, then the debtor will have to update all income and expenses and list any new debts incurred through the Chapter 13 proceeding up to that point. Then, creditor payment claims must be handled, and they may even file new Proofs of Claim, depending on the circumstances. The debtor will then meet with them to determine a new plan of action towards resolving all outstanding debts.
Any property you had when your Chapter 13 was originally filed and still have at the time the case is converted to a Chapter 7 becomes property of the Chapter 7 bankruptcy estate. Property acquired after the filing of the Chapter 13 will generally not become property of the Chapter 7 bankruptcy estate unless it is determined that the conversion was done in bad faith. Your original property you still have when your case has completed conversion must still be exempted to protect it from liquidation by the Chapter 7 trustee. The trustee will then distribute the proceeds to your creditors. This is why it’s so important to really think about the viability of a Chapter 7 filing. It will likely mean liquidating all non-exempt assets to distribute payments to creditors.
Above all, this particular conversion process may not be right for everyone (nor will it be approved for all cases), but it can help those who have had a drastic change in circumstances during their Chapter 13 and may need to surrender property due to severe loss of income. However, a debtor who stops making payments in a Chapter 13 filing will face a case dismissal. The debtor will receive credit for the payments made and will remain responsible for any outstanding balances. Conversion to Chapter 7 and receiving a discharge, even with the loss of property, may be preferable to dismissal and either refiling a new Chapter 13 case or dealing with renewed creditor collection efforts.
Natural State Law understands the bankruptcy conversion process can be confusing and unclear. Call us today at (501) 916-2878 to discuss your personal situation with one of our qualified bankruptcy attorneys to better understand your options when it comes to Chapter 13 and Chapter 7 proceedings.