Individuals who file for Chapter 13 bankruptcy sometimes find themselves unable to afford funding their Chapter 13 case. Luckily, the bankruptcy laws were designed to anticipate this scenario and Congress realized that unexpected emergencies such as unforeseen bills, illness, and loss of employment happen. At this time of year in particular, we often see a large number of Chapter 13 clients that are considering converting to a Chapter 7 case. At the start of the New Year, people often re-evaluate where they are financially. In addition, many people will be receiving their income tax refunds and this can be a great time to make a new financial start with a Chapter 7 case.
Switching Your Case to Chapter 7 Bankruptcy
There are always lots of different moving parts in a bankruptcy case so first and foremost, make sure that you schedule an appointment with your attorney to review your current situation before converting to Chapter 7.
The first question that needs to be answered is whether you are even eligible to proceed under Chapter 7 by converting your case. You must verify that it was over eight (8) years since the filing date of a prior Chapter 7 from the filing date of the Chapter 13 case. If you were not eligible to file for Chapter 7 when you filed your Chapter 13 case then you cannot convert your case. You will need to look at whether you can file a motion to dismiss the Chapter 13 and then file Chapter 7.
The advantage of converting to Chapter 7 from Chapter 13 is that you will only have to pay an additional $25.00 filing fee (Chapter 7 filing fee is $335.00 if you file it brand new). Additionally, you are not required to re-qualify under the bankruptcy Means Test. You will have to show however a new budget (Schedule I and J) to reflect that you can no longer afford your Chapter 13 payments and that you don’t have enough excess income to pay your bills.
A key issue to assess is whether you will have to allow the Chapter 7 trustee to liquidate your assets when you convert your case. Before converting your case you need to review the fair marketing value of your assets with your attorney to ensure that they will be protected when you covert your case. If you are not able to protect your assets with the available exemptions then the Chapter 7 trustee can sell the assets for the benefit of your creditors.
Another consideration before you convert to Chapter 7 from Chapter 13 is whether you are paying off a vehicle loan inside your Chapter 13 Plan. Converting to Chapter 7 will cause the auto loan to, in most cases, go into default status because the loan was stretched out in the Chapter 13 Plan, most likely at a lowered interest rate. In many Chapter 13 Plans, the loan can be “crammed down,” meaning only the fair market value of the vehicle is considered a higher priority secured debt (which must get paid, with interest). Once you convert to Chapter 7 that all goes away so you lose that benefit of Chapter 13.
While some car creditors will just allow you to pick back up making your payments per a reaffirmation agreement, others will demand the account be caught up before allowing you to reaffirm the debt and retain the car. There is no way we can no what creditor will agree to what so you need to be prepared for the worst if you decide to convert in regards to catching up your car payments.
Another thing to consider when converting a case to Chapter 7 is that you can include any creditors you owe or debts you incurred after you filed your Chapter 13 and up to the date of the conversion. In addition, you keep the same case number that you were assigned when the case was first filed. This means that instead of a 2nd bankruptcy case showing on your credit reports, you only have a single case showing.
It is always a good idea to contact an attorney who is knowledgeable about the ins and outs of Chapter 7 and Chapter 13 bankruptcy when you are considering converting your Chapter 13 case to a Chapter 7 case.