If you can no longer afford to make your Chapter 13 bankruptcy plan payments, you may be able to convert your case to a Chapter 7. Unless you have already received a Chapter 7 bankruptcy discharge within the last eight years, you can convert your Chapter 13 case to Chapter 7 at any time. To convert your Chapter 13 to a Chapter 7, you simply file a Notice of Conversion with the court and pay a conversion fee. However, keep in mind that you must still qualify for Chapter 7 bankruptcy in order to complete your case and receive a discharge (discussed below).
Reasons To Convert Your Case
In general, most debtors convert their Chapter 13 bankruptcy to Chapter 7 because:
- they can no longer afford to make Chapter 13 plan payments due to a change in their financial circumstances, or
- they wish to surrender a property (such as a house or car) that the Chapter 13 was designed to save.
Qualifying For Chapter 7 Bankruptcy
To qualify for Chapter 7 bankruptcy, you normally have to pass a means test. But bankruptcy courts are divided on whether the means test applies in a Chapter 7 case that was converted from a Chapter 13. While some jurisdictions require debtors to pass the means test when they convert their Chapter 13 to Chapter 7, other courts have held that the means test is not applicable in a conversion.
If you filed a Chapter 13 bankruptcy because you could not qualify for a Chapter 7, you should discuss the matter with a knowledgeable bankruptcy attorney before converting your case. Also, keep in mind that even if the Court does not require you to comply with the means test when you convert, you may still have to explain to the court how your financial circumstances have changed and why you can no longer afford to be in a Chapter 13.
What Happens When You Convert Your Bankruptcy?
When you convert your case, you will be assigned a new Chapter 7 bankruptcy trustee. You will also need to attend a new meeting of creditors (also called the 341 hearing). While you don’t have to file a new bankruptcy petition, you typically need to file additional forms and amend certain schedules after converting your bankruptcy.
In some cases, to show that your financial circumstances have changed and that you can no longer afford to make Chapter 13 payments, you may need to file amended Schedules I and J to reflect your current budget. The Court may also require a declaration explaining your reasons for converting. If you have a mortgage, car loan, or other secured debt, you will also need to file a Statement of Intention to tell the court what you intend to do with the property securing that loan.
You will also have to disclose if you have incurred any post-petition debts or acquired any post-petition assets while you were in the Chapter 13 case.
In Some Circumstances The Bankruptcy Court Can Force You Go Convert From Chapter 13 To Chapter 7
Under certain circumstances, the Court can force you to convert your Chapter 13 bankruptcy to Chapter 7 so that your nonexempt assets can be sold to pay your creditors. The most common reasons a Court may force you to convert include lying in your bankruptcy documents, hiding assets, filing for bankruptcy primarily to hinder or delay creditors, or otherwise abusing the bankruptcy system.
Can I Convert To A Chapter 7 Without Losing My House Or Car?
When you file for Chapter 13 bankruptcy protection, the Court requires you to make payments on a three to five-year payment plan. Sometimes, conversion to Chapter 7 is necessary because you can’t keep up with the payments required under your Chapter 13 plan, but conversion may be possible regardless of your reason. Depending on your situation, you may keep your house and car under Chapter 7, though generally the payment must be current.
Chapter 13 Vs. Chapter 7
Unlike Chapter 13, Chapter 7 requires no repayment plan. Instead, your nonexempt assets can be seized by a Court-appointed bankruptcy trustee and sold, or liquidated, to pay your debts. You can convert your Chapter 13 case to a Chapter 7 case by filing a motion to convert in bankruptcy Court, but you must first qualify for Chapter 7. You will qualify if you earn less than your state’s median income for a family of the same size as yours. If you earn more, the Court may require you to pass a means test based on your disposable income, which is your total income minus allowable deductions.
Under Chapter 7, you may be able to keep assets, including your house and car, if the asset is fully exempt under federal or state law and you make the payments due on these assets. Common exemptions include homes, vehicles, personal property, household goods and appliances, but you will need to speak to an experienced bankruptcy lawyer to determine if you will be able to keep assets that are important to you.
If you owe money on a secured debt, like your house or your car, you can reaffirm the debt during your Chapter 7 case instead of allowing the lender to take your property. Reaffirmation means you accept the debt and promise to pay it even though it could otherwise be eliminated through your bankruptcy case. For example, if you owe $10,000 on a car loan for a car that now is worth $7,000, reaffirmation means you agree to pay the entire $10,000 instead of allowing the lender to take the car. You must convince both the lender and the Court that they should allow a reaffirmation of the debt. You may need show that you are current with your payments and prove you can keep up with the future payments.
You can also keep your car or home by redeeming it. To redeem, you pay the fair market value of the property regardless of what you owe on the loan. This can be beneficial if you owe more on your loan than the property is worth. However, you cannot use the existing loan’s terms; you must get a new loan to pay off your lender immediately or pay the redemption amount in full. Since you are going through bankruptcy, it may be difficult to get a loan at reasonable rates.