Yes. Yes you usually can. Sometimes you have to get court approval. Call us and we’ll walk you through it.
Chapter 7 bankruptcy is also called a liquidation bankruptcy because the individual’s property may be sold, or liquidated, in order to satisfy their debts. In order to qualify for a Chapter 7 bankruptcy, an individual must be at or below the median income in their state. Each state has its own requirements regarding who is eligible to file for bankruptcy.
On the other hand, a Chapter 13 bankruptcy, also called a wage earner’s bankruptcy, allows an individual to retain some of their property while agreeing to a payment plan to repay their debts. It is important to note that in both types of bankruptcies there are certain debts which cannot be discharged. Once the bankruptcy process is completed, the bankruptcy court enters a discharge order which releases the debtor from their debts. At that time, the debtor gains a clean financial slate. It is important to note, however, that the bankruptcy remains on the individual’s credit report for up to 10 years.
Why Would a Debtor Convert from Chapter 13 to Chapter 7 Bankruptcy?
As noted above, there are two main types of bankruptcy, reorganization and liquidation. A Chapter 13 bankruptcy is a reorganization type.
There are different factors which affect how the individual’s debt is reorganized and restructured, including the kind of debt the debtor includes in their bankruptcy petition, as some debts cannot be discharged such as:
• child support;
• student loans;
• taxes; and
• other debts;
• The type of relationship the debtor and the creditor have regarding the debt;
• The debtor’s ability to pay off the amount owed within a reasonable period of time; and
• The bankruptcy judge’s final determinations regarding the debt.
In some cases, a bankruptcy may be converted from a Chapter 13 to a Chapter 7, which may be necessary when:
• The debtor’s financial situation has changed and they can no make the required payments in the Chapter 13 repayment plan; or
• The debtor originally filed under Chapter 13 because they wanted to keep property, but now no longer wants to keep that property.
In general, converting a Chapter 13 bankruptcy to a Chapter 7 bankruptcy may be requested at any time following the filing of the Chapter 13. The conversion process is similar to filing a new Chapter 7 claim. It is important to note that the usual restrictions apply when converting from Chapter 13 to Chapter 7. For example, the debtor is required to wait at least 8 years from a prior Chapter 7 bankruptcy filing.
Forced Conversion from Chapter 13 to Chapter 7
In certain bankruptcy cases, the bankruptcy court requires a debtor to convert a Chapter 13 to a Chapter 7 claim. This is called a forced conversion, which is backed by a court order allowing the conversion. If an individual fails to make the ordered conversion, it could result in legal penalties. A forced conversion may only be ordered if a court has good cause to do so.
Examples of good cause to force a bankruptcy conversion include, but are not limited to:
• The debtor failed to create a Chapter 13 plan within the required time frame;
• The debtor failed to keep up with their required Chapter 13 payments; and/or
• The debtor was involved in some unreasonable delay which resulted in harm to a creditor or creditors.
It is important to note that the bankruptcy court will not likely force a conversion if the debtor is doing everything within their abilities to comply. Examples may include missing a payment because of unforeseen circumstances, such as an unanticipated medical emergency. If, however, the debtor’s actions indicate to the bankruptcy court that they are attempting to take advantage of their creditors in some way, the court may force a conversion from Chapter 13 to Chapter 7.
What is needed to Switch from Chapter 13 to Chapter 7?
There are a number of requirements that a debtor must meet prior to filing for a Chapter 7 bankruptcy. This includes a means test. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) prohibits a debtor with a higher income from filing for Chapter 7 bankruptcy. The means test examines the debtor’s income in order to determine eligibility to file for Chapter 7 bankruptcy. A debtor is required to submit either a Form 22A for a Chapter 7 bankruptcy or Form 22C in a Chapter 13 bankruptcy. The form must be submitted to a bankruptcy court prior to the court hearing the debtor’s case. Courts are not in agreement as to whether the means test applies to a debtor who is converting to a Chapter 7. Some courts hold that the means test only applies to a debtor who initially files for Chapter 7.
There are certain elements that must be addressed when a debtor converts from a Chapter 13 to a Chapter 7 bankruptcy, including:
• Petition and schedule;
• Proof of claims;
• Creditor meeting; and
A petition must be filed with the bankruptcy court. When a bankruptcy is being converted, the original Chapter 13 petition typically carries over during the conversion process. However, a new schedule may need to be created. The debtor will be required to obtain a proof of claims. This shows that the creditor has a valid claim on the debt. This may be carried over from the original Chapter 13 case. When converting chapters, the debtor must attend another meeting with their creditor or creditors. This applies even if a meeting was held during the Chapter 13 proceedings. Depending on the jurisdiction, the court may use the date of the Chapter 13 filing to determine exemptions. Other courts will use the Chapter 7 conversion date.
Many of the Chapter 7 bankruptcy requirements will be fulfilled automatically when the claim is converted from the Chapter 13 filing. A debtor, however, should consult with an attorney for assistance with other requirements. For example, some of the paperwork that will be carried over from the Chapter 13 petition may need to be amended or adjusted for the Chapter 7.
How Much Does It Cost to Switch from Chapter 13 to Chapter 7 Bankruptcy?
The costs of switching a Chapter 13 to a Chapter 7 bankruptcy depend on numerous factors. These include, but are not limited to:
• The cost of the court appointed trustee;
• Court costs; and
• Attorney’s fees.
When a debtor’s bankruptcy is converted from a Chapter 13 to a Chapter 7, the court will assign a new bankruptcy trustee. In addition, a new 341 meeting of the creditors must be held. In other words, there are various costs that will be incurred when switching from a Chapter 13 to a Chapter 7. Because the debtor must attend an additional meeting of the creditors, they may be charged additional attorney’s fees. However, the debtor will not be required to file and pay fees for a new bankruptcy petition.
Should I file Chapter 7?
Chapter 7 is an option to consider if you have little to no disposable income. In fact, you’ll have to pass a means test to prove that you can’t afford to pay your debt in order to file.
Here are some things to consider if you’re deciding whether Chapter 7 bankruptcy is right for you.
1. It could reduce your monthly debt-repayment load
When you have a debt discharged through Chapter 7 bankruptcy, you’re no longer legally required to pay that debt back. That means the money you were paying toward that loan or credit card, for example, can now be used for other things, like household necessities. Note that there are a number of exceptions to the debts that can be discharged in Chapter 7, so we recommend contacting a bankruptcy lawyer before you file.
2. It can provide relief from debt collectors
If you can’t afford your unpaid debts, Chapter 7 can be a helpful tool to stop debt collectors from taking action against you. When you file, some of your creditors may be temporarily restricted from the following;
• Collecting money from you
• Contacting you
• Continuing wage garnishment
• Starting or continuing lawsuits against you or your property
3. You may be able to clear your debts faster with Chapter 7 than with Chapter 13
Where Chapter 13 bankruptcy typically takes three to five years to complete, Chapter 7 generally takes about 90 to 100 days from start to finish, in addition to the time it takes to complete a credit counseling course prior to filing.
4. You will lose some assets
One of the main consequences of filing Chapter 7 is the possible loss of your assets. Depending on the laws in your state, and whether you have equity in certain assets, your cash or property will be at stake.
5. Your credit could take a hit
The other major consequence of a Chapter 7 bankruptcy is the impact to your credit. A Chapter 7 bankruptcy can stay on your credit reports for up to 10 years from the date you file. That doesn’t mean you’ll never be able to open a credit card or take out a mortgage again, but it does mean you might have to pay a lot more in interest rates and fees when borrowing.
Should I file Chapter 13?
Chapter 13 is a bankruptcy option to look at if you own property that you want to keep.
Here are some things you should consider.
1. If you have sufficient income, you may be required to file Chapter 13
To qualify for a Chapter 7 bankruptcy, you’ll have to prove you can’t repay your debt. If, depending on your income and your state’s median income requirements, your current monthly income is more than your state’s median income for a family of your size, you may not be allowed to file Chapter 7. In this case, Chapter 13 could be the right option for you.
2. It can stop debt collections and the foreclosure process
If you’re a struggling homeowner, Chapter 13 could be the help you’re looking for. Filing Chapter 13 can stop the foreclosure process and give you a chance to catch up on your past-due mortgage payments. And if you have debts in collections, any debts discharged during Chapter 13 means your creditors can no longer take any action to try to collect the money from you.
3. It can help you repay your debt
Chapter 13 can also provide a more convenient and cost-effective way to repay your debt. Through Chapter 13, you’ll make a plan to repay all or some of your debts. You can make one consolidated monthly payment toward your debts based on your repayment plan. This lump payment will then be distributed to your creditors. Your monthly payments may also be reduced for certain types of debts, so you can repay them over the course of your three- to five-year plan.
4. It can take three to five years to discharge your debts
Chapter 7 bankruptcy can help you discharge your debts relatively quickly, but the same isn’t true for Chapter 13. Under Chapter 13, responsibility for your debt doesn’t end until your repayment plan has been completed, which typically takes three to five years.
5. The repayment plan can strain your budget
You have to pledge your disposable income for the duration of the plan. That can be difficult, especially if income is variable.
6. If you can’t stick to the repayment plan, you could lose your Chapter 13 status and maybe even assets
If you’re unable to make your payments under the plan, your bankruptcy case could be dismissed or converted to Chapter 7, which means you could again be in jeopardy of losing assets like your home or car. Your repayment plan could also be at risk of being dismissed or converted to Chapter 7 by the court if you fail to file required taxes during your case or if you fail to pay domestic support obligations, such as child support and alimony, after filing.
7. The impact on your credit may not be as severe
Like Chapter 7, Chapter 13 bankruptcy may have a very negative impact on your credit. A completed Chapter 13 bankruptcy can stay on your credit reports for up to seven years from the date you file. But some creditors could view a Chapter 13 bankruptcy more favorably than a Chapter 7 bankruptcy. It could be an indication that you repaid more of your debt.
Advantages to a Chapter 7 Bankruptcy Filing
1. The amount of debt you can erase is not limited.
2. Unpaid balances due after assets are distributed are erased (“discharged” in bankruptcy language).
3. Wages you earn and property you acquire (except for inheritances) after the bankruptcy filing date are yours, not the creditors or bankruptcy court.
4. There is no minimum amount of debt required.
5. Your case is often over in about 3-6 months, enabling you to get out from under the burden of debt quicker.
Disadvantages to a Chapter 7 Bankruptcy Filing
1. You lose your non-exempt property which is sold by the trustee.
2. Some debts survive and can be collected after your case is closed (e.g., mortgage liens).
3. If facing foreclosure on your home, lender’s efforts are only temporarily stalled by filing.
4. Co-signors of a loan can be stuck with your debt unless they file for similar protection.
5. You can file this type of bankruptcy only once every eight years.
6. Bankruptcy damages your credit rating.
7. It is difficult to withdraw from a Chapter 7 filing.
Advantages to a Chapter 13 Payment Plan
1. You keep all your property, exempt and non-exempt.
2. You have a longer period of time to pay the debt.
3. The debts that are not canceled in a Chapter 7 discharge can be reduced in a Chapter 13 payment.
4. You have protection against creditor’s collection efforts and wage garnishment.
5. Any co-signers are immune from the creditor’s efforts so long as the Chapter 13 plan provides for full payment.
6. You have protection against foreclosure by your lender of your home.
7. You can file a Chapter 13 after your Chapter 7 discharge to pay off any remaining liens.
8. You can file repeatedly.
9. You can separate your creditors by class. Different classes of creditors receive different percentages of payment. This enables you to treat debts where there is a co-debtor involved on a different basis than debts incurred on your own.
Disadvantages to a Chapter 13 Payment Plan
1. You pay your debts out of your disposable (post-bankruptcy) income. This tie up your cash over the repayment period.
2. Some debts will survive after your bankruptcy is closed and you must continue paying.
3. Legal fees are higher since a Chapter 13 filing is more complex.
4. Your debt must be under $1,578,925 (e.g., unsecured debts are less than $419,275 and secured debts less than $1,257,850). These amounts are adjusted every three years; the next adjustment period is April 1, 2022.
5. Your debt can linger for years, burdening future income.
6. Stockbrokers, and commodity brokers cannot file a Chapter 13 bankruptcy petition.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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West Jordan, Utah
84088 United States
Telephone: (801) 676-5506