Chapter 13 is a payment plan that normally lasts from three to five years, but sometimes the objectives of the payment plan have changed and it is time to consider dismissing the case or converting to the other bankruptcy option: Chapter 7. However, there are many factors to consider when converting a case to Chapter 7 and it is important to review the case from top to bottom all over again.
Am I eligibe to convert to Chapter 7?
Bankruptcy Code Section 1307 provides that a debtor may convert his or her case to Chapter 7 at any time provided they were eligible to file Chapter 7 at the time the Chapter 13 case was filed. In other words, if you could have filed Chapter 7 to begin with you are able to convert from Chapter 13 to Chapter 7 at any time.
Did you file Chapter 7 within 8 years of filing Chapter 13?
If you filed a previous Chapter 7 case within 8 years of filing your Chapter 13 case you are not permitted to convert the case to Chapter 7. (See Bankruptcy Code Section 727(a)(8) ). But what if the 8 years expires during the middle of the Chapter 13 case? Sorry, same result. In order to convert a case to Chapter 7 you had to be eligible to file Chapter 7 on the day you filed Chapter 13. There was some confusion on this issue, but recent opinions by the Nebraska bankruptcy court has addressed this issue.
Do I have to go to court again? Yes, you will have to attend another hearing before the Chapter 7 Trustee about one month after the case is converted.
May I add new debts to the bankruptcy? Yes, you may add new debts that you have incurred after the Chapter 13 case was filed. In fact, this is a major reason to consider converting a case. Very often I meet with new clients who lack health insurance or their existing insurance will not fully cover all the anticipated medical expenses they will incur in the future. If it is likely that you will continue to incur medical bills not fully covered by insurance, then it may be wise to consider filing Chapter 13 until the medical situation stablizes and then convert to Chapter 7 when it appears that no future medical bills will be incurred. Too often I see debtors file Chapter 7 only to be back in deep medical debt a year later.
Will I incur additional legal fees to convert my case? There is a $25 court fee to convert a case, and there may be additional legal fees depending on how much your attorney was paid in the Chapter 13 case.
Dangers of Converting a case to Chapter 7.
A common error committed by attorneys when converting a case from Chapter 13 to Chapter 7 is that they have forgotten about all those non-exempt assets that would have been claimed by the Chapter 7 Trustee. You see, Chapter 7 is a "liquidation" bankruptcy, and that means that the Chapter 7 Trustee has the power and the duty to sell off any unprotected asset so that creditors may receive some payment on their debt. However, Chapter 13 cases involve no such liquidation and attorneys often recommend that a client file Chapter 13 when certain assets would be at risk in a Chapter 7 case, but they forget this fact 2 or 3 years into the Chapter 13 case and often will convert a case without reevaluating the dangers involved. Sometimes it is better to simply dismiss the current case and then file a brand new Chapter 7 instead of converting the case.
If your Chapter 13 case no longer makes sense, if the mortgage company broke through the bankruptcy protection and is back to foreclosure, if you have lost your job and cannot make the bankruptcy payment, or if other changes have occurred, contact your attorney to see if now is the time to consider a conversion to Chapter 7.
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