Sometimes when you file for Chapter 7 bankruptcy, you may later decide that Chapter 13 is the better option. Or, sometimes the court may require you to convert to Chapter 13 bankruptcy. Read on to learn why you might want to convert from a Chapter 7 bankruptcy to a Chapter 13 case, why a court might require you to do so, and how to convert your case.
(To learn about Chapter 7 and Chapter 13 bankruptcy and the difference between the two, Should I File Chapter 7 or Chapter 13?.)
Even though most people use Chapter 7 and should not convert, some people will need to convert their case to Chapter 13 after they file. You may decide to convert voluntarily, or the court may require that you convert.
A court will require you to convert to Chapter 13 if it determines that you are not eligible to file for Chapter 7. Usually this happens because you made a mistake with the Chapter 7 means test.
The means test is a challenging mathematical calculation used to determine who is and who is not eligible to file a Chapter 7 case. The purpose of the means test is to determine if you can afford to pay a certain portion of your unsecured debts through a repayment plan. If you fail the means test, then you are not eligible for Chapter 7. If that happens because of a mistake in your means test, then you may need to convert to Chapter 13. (To learn how the means test works, see The Chapter 7 Means Test.)
The court cannot force you to stay in a Chapter 13 case, however. So if you do not want to make payments under the three- or five-year repayment plan required by Chapter 13, you can ask the court to dismiss your case.
It might be in your best interest to convert from a Chapter 7 to a Chapter 13, even if you don’t have to. It could be that your financial circumstances changed since the time you filed for Chapter 7.Or it could be that you later realize that you made a mistake and will lose valuable property, you accidentally failed to disclose a valuable asset, or won’t be able to discharge a particular debt.
Your financial circumstances have changed. If your financial circumstances have changed (for example, you got a new job with higher income), you may want to take advantage of some of the benefits that Chapter 13 provides, such as the ability to catch up on overdue mortgage payments or back payments on your car loan. Chapter 13 gives you more flexibility than Chapter 7 in this area as well as other options. For example, you might be able to remove a second mortgage on a house or reduce the principal on car loans. In addition, while you can’t discharge domestic support obligation like child support or alimony, Chapter 13 might help you get caught up on these debts. (To learn about these options in Chapter 13, visit our Chapter 13 Bankruptcy topic area.)
Your property is worth more than you thought. If it turns out that you cannot exempt the full value of your property in Chapter 7 because you underestimated its actual value, then you might want to convert to Chapter 13 because it lets you keep most property. (Learn how bankruptcy exemptions work in Chapter 7 bankruptcy.)
You accidentally failed to disclose a valuable asset. You might have inadvertently failed to disclose a valuable asset because you didn’t think you had to, such as a legal claim against someone’s insurance for a car accident, for example. Even if the bankruptcy exemptions won’t let you keep the insurance proceeds in Chapter 7, you might be able to keep them in Chapter 13. Nobody will require you to convert your case if this happens, but you might be faced with a choice of converting or losing the asset you didn’t disclose in Chapter 7.
You can discharge a particular debt only in Chapter 13. This might happen if it turns out that you need to discharge some debts that can only be discharged in Chapter 13. For example, if you want to discharge your liability for the amount of money you owe after a car accident, then you should consider converting to Chapter 13 because it discharges more debts than Chapter 7 does.
It is fairly easy to convert your case in most courts. In fact, many courts say that you are absolutely entitled to convert under the Bankruptcy Code, even if one of your creditors or the trustee objects.
In order to convert your case, you will need to do the at least the following:
Keep in mind that many courts require you to follow additional rules, so review the local rules published on your court’s website or consult with an attorney familiar with your court’s procedures.
Even though the process is usually simple, there are some unusual circumstances in which the court will not permit you to convert to Chapter 13.
You are not eligible for Chapter 13 bankruptcy. You need to be eligible to file a case under Chapter 13. While most people won’t have any problems with Chapter 13’s eligibility requirements, problems might come up if you have a very large amount of debt or do not have a stable source of income.
You acted in bad faith. Some courts are reluctant to allow people to convert their cases if there is strong evidence that they were acting in bad faith. The circumstances in which this applies are very unusual, such as when a person was trying to hide major assets only to be discovered by the Chapter 7 trustee.
Your case had already been converted from another chapter. The court may not grant your motion if your case was involuntarily converted from another chapter of the bankruptcy code to a Chapter 7. Put simply, if for some reason your case was previously converted from another chapter to Chapter 7 at the request of a creditor, the trustee, or the court, then bankruptcy law prohibits you from converting back to Chapter 13.
Even though the process of converting is straightforward, you might want to take some time to plan out your Chapter 13 case before you convert. Chapter 13 requires you to take more proactive steps than a Chapter 7 case does, such as filing a Chapter 13 plan and quickly starting payments. So be sure you are prepared for the additional steps well before you ask the court to convert your Chapter 7 case to Chapter 13.