We have many clients in Chapter 13 bankruptcy, and every so often one of those clients will ask if it makes sense for him or her to convert to a Chapter 7 Bankruptcy.
My answer is: It depends.
Did you file a previous Chapter 7 case within the eight (8) years prior to the date you filed your current Chapter 13 case?
- If you did then you cannot convert your Chapter 13 to a Chapter 7. There must be eight years between Chapter 7 bankruptcy filings and a converted Chapter 7 case from a Chapter 13 case is considered filed as of the date the current Chapter 13 was filed and NOT from the date of conversion.
- If there has been more than eight (8) years since your previous Chapter 7 filing but less than eight years between your previous Chapter 7 filing and your current Chapter 13 filing then you could dismiss your Chapter 13 and file a new Chapter 7, provided there wouldn’t be other issues.
Did you file a previous Chapter 13 case within the six (6) years prior to the date you filed your current Chapter 13 case?
- If you did then you cannot convert your Chapter 13 to a Chapter 7. There must be six (6) years between a previous Chapter 13 filing and the current Chapter 7 filing (relating back to the filing date of the current Chapter 13).
- There is a caveat to this rule: If your previous Chapter 13 paid off all unsecured claims OR your previous Chapter 13 paid off 70% of unsecured claims and the plan was in good faith and the debtor made his/her best effort to pay then you wouldn’t need to wait to convert to a Chapter 7.
- If there has been more than six (6) years since your previous Chapter 13 filing but less than six years between your previous Chapter 13 filing and your current Chapter 13 filing then you could dismiss your Chapter 13 and file a new Chapter 7, provided there wouldn’t be other issues.
Do you have assets that were not fully exempt in your current Chapter 13 case?
- If so then converting to a Chapter 7 would put those assets at risk of being liquidated by the Chapter 7 Trustee.
- You might be better off staying in the Chapter 13 or dismissing your Chapter 13 and then selling the assets and spending down the proceeds or putting the proceeds into assets that can be exempted before filing a new Chapter 7.
Do you have vehicle loans or other secured loans which are being “Crammed Down” or are able to use the Trustee’s interest rate in your Chapter 13?
- “Cram down” means you are paying off a secured loan at a reduced amount versus the loan balance.
- There are criteria that must be met to be eligible for a cram down (e.g., must have purchased your vehicle more than 910 days before your case was filed, whereas other assets require the purchase to be made more than one (1) year before the case is filed)
- A vehicle loan can be “crammed down” to the “value” of the vehicle if the value is less than the loan balance, and the rest of the loan would be considered “unsecured” and would get paid 0% up to 100% depending on your “disposable income” or “non-exempt asset equity”.
- If you have a “cram down” in your Chapter 13 then converting to a Chapter 7 would negate the cram down and you’d still have to pay the part of the loan that would have been considered “unsecured” in the Chapter 13.
- If you are not eligible for a cram down on a secured loan you can use the Trustee’s interest rate on your secured loan if your contract rate is higher than the Trustee’ interest rate.
- For example, if your contract rate is 20% but the Trustee’s rate is 5% then you get to use 5% as the rate for paying off the secured loan through your Chapter 13. In some cases that will save you thousands of dollars in interest.
- If you convert your Chapter 13 to Chapter 7 you no longer get to use the Trustee’s interest rate on your secured loan and would be bound by the contract rate. This means you still owe the interest that wasn’t being paid during your Chapter 13.
Have you had a significant change in income or expenses or a hardship which makes it unlikely you can finish your Chapter 13?
- If you’ve had a significant loss of income and/or significant increase in expenses which make you unable to make your Chapter 13 plan payments then you can seek to convert to a Chapter 7 based on the change in circumstances.
- You have to show in your Schedules (I and J) that your new circumstances leave you with no disposable income from which to make Chapter 13 payments.
- You might also be able to seek a “hardship” discharge in the Chapter 13 instead of converting to Chapter 7. The court will look at the following to determine if you should receive a hardship discharge in Chapter 13.
- Circumstances beyond your control.You failed to complete your plan payments due to circumstances “for which you should not justly be held accountable.” Your burden is to show more than just a temporary job loss or physical disability. The key to proving the permanence of your condition will likely be medical evidence.
- Unsecured creditors received adequate payment.Based on what you have already paid into the plan, your unsecured creditors have received at least what they would have received if you had filed for Chapter 7. (This is typically a hard condition to meet unless you have little or no nonexempt property.)
- Modification of your plan is not practical.To meet this requirement, you don’t have to file and lose a motion for modification. You just need to show the bankruptcy court that you don’t have enough money to pay into a modified plan.
There are many factors to consider when determining whether it makes sense to convert from Chapter 13 to Chapter 7. You should speak with one of our experienced bankruptcy attorneys to find out what might be possible.
By Errin Stowell, W M Law Attorney