Converting a Bankruptcy Case from Chapter 13 to Chapter 7

Chapter 13 bankruptcy can help solve many problems, but completing a three- to five-year plan isn't always possible after a job loss, illness or injury, or some other income-lowering event. If you can’t afford to make your Chapter 13 payments any longer, read on to learn why you might want to convert from Chapter 13 to Chapter 7 and how to do it.

Reasons to Convert From Chapter 13 to Chapter 7

Experiencing an involuntary decrease in income or wanting to return a house or car to the bank are common reasons for changing bankruptcy chapters. Converting from Chapter 13 to Chapter 7 bankruptcy allows the debtor to "discharge" or wipe out all qualifying debt, including mortgages and car loans, without making further plan payments.

By contrast, if a debtor simply stopped making payments without converting to Chapter 7, the bankruptcy court would dismiss the case. The debtor would receive credit for any Chapter 13 payments made, but would remain responsible for any outstanding balances on unpaid debts.

Qualifying for Chapter 13 to Chapter 7 Conversion

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, so you might need to create it. However, your court might have a local form.

Unless you have received a Chapter 7 bankruptcy discharge within the last eight years, you can convert your Chapter 13 case to Chapter 7 anytime. Learn the rules that determine how often you can file for bankruptcy.

Typically, you must pass the means test to qualify for a Chapter 7 discharge. But bankruptcy courts are divided on whether the means test applies in a Chapter 7 conversion, with some not requiring it. You'll likely need to qualify unless you're exempt from the means test, but check the rules in your jurisdiction just in case.

Learn about qualifying for Chapter 7 bankruptcy with a high income.

Losing Property in Chapter 7 Bankruptcy

Chapter 7 is considered a "liquidation" bankruptcy because instead of the debtor paying creditors to keep property, the Chapter 7 trustee sells the debtor's property for the benefit of creditors. This can be problematic because many people file for Chapter 13 to keep property they'd lose in Chapter 7.

If you find that you can’t protect all of your property equity with a bankruptcy exemption, you might need to make some difficult decisions. Additional requirements exist if the house, car, or other asset is financed. Payments must be caught up to prevent foreclosure, repossession, or seizure by the lender, a condition you might not be able to satisfy if you filed for Chapter 13 to catch up on arrearages and haven't yet paid them fully.

You'll tell the court and creditors what you intend to do with the property securing a loan by completing a Statement of Intention for Individuals Filing Under Chapter 7 form. Learn how to avoid losing your car, home, and other financed property in Chapter 7 bankruptcy.

Procedures After Converting to Chapter 7

You will be assigned a Chapter 7 bankruptcy trustee and attend a "meeting of creditors" or "341 hearing." While you won't file a new bankruptcy petition, you typically need to file additional bankruptcy forms and amend particular schedules after conversion.

For instance, 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 might also require a declaration explaining your reasons for converting.

When to Seek Legal Help

Converting a Chapter 13 case to Chapter 7 can be beneficial because 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.

If you're considering converting your case to Chapter 7, it’s prudent to consult with a local bankruptcy attorney so that you understand the ramifications of a conversion. A lawyer will likely also discuss other options if you can't afford your monthly Chapter 13 payment. For instance, you might learn you can lower your Chapter 13 payment.