Chapter 13 can help solve a lot of problems. But it isn't easy to complete a plan—especially if you suffer a job loss, illness or injury, or some other income-lowering event.
If you can't afford to make your Chapter 13 plan payments any longer, you might be able to convert your case to a Chapter 7. Read on to learn more about how to convert your Chapter 13 to Chapter 7.
Most debtors run into problems in Chapter 13 bankruptcy when:
But a debtor who stops making payments will face a case dismissal. The debtor will receive credit for the payments made but will remain responsible for any outstanding balances. By contrast, a Chapter 7 conversion will allow the debtor to discharge (wipe out) all qualifying debt.
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. You'll file a Notice of Conversion with the court and pay a conversion fee. An official bankruptcy form doesn't exist for this notice; however, your court might have a local form.
Keep in mind that you must still qualify for Chapter 7 bankruptcy to complete your case and receive a discharge (discussed below).
In most instances, a debtor must pass the means test before qualifying for a Chapter 7 discharge. But bankruptcy courts are divided on whether the means test applies in a Chapter 7 conversion. While some jurisdictions require debtors to pass the means test, others don't.
If you filed a Chapter 13 bankruptcy because you could not qualify for a Chapter 7, check the rules in your jurisdiction or talk to a knowledgeable bankruptcy attorney before converting your case. Also, even if the means test isn't required, you'll still have to explain why you can't afford your repayment plan (more below).
When you convert your case, you will be assigned a Chapter 7 bankruptcy trustee. You will also need to attend a 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 particular schedules after converting your bankruptcy.
You'll show that you can't afford to make Chapter 13 payments by amending Schedule I and Schedule J to reflect your current budget. Some courts may also require a declaration explaining your reasons for converting.
If you have a mortgage, car loan, or other secured debt, you'll need to file a Statement of Intention for Individuals Filing Under Chapter 7. The form tells the court and creditors what you intend to do with the property securing that loan.
When you filled out your Chapter 13 case, you listed your property on Schedule A/B. Property you still have when you convert your case, and that you can't protect with a bankruptcy exemption, will be sold by the Chapter 7 trustee. The trustee will distribute the proceeds to your creditors.
Many people file for Chapter 13 to retain property. So this is the rule that can give people the most grief. You might have to give up a home, car, or treasured possession.
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 include lying on your bankruptcy papers, hiding assets, filing for bankruptcy to hinder or delay creditors, or otherwise abusing the bankruptcy system.
Converting a Chapter 13 case to Chapter 7 can be beneficial. If you qualify, it will wipe out qualifying debt, such as credit card balances, medical bills, and personal loans. But you could lose valuable property. It's prudent to consult with a local bankruptcy attorney so that you understand the ramifications of a conversion.