Converting Your Chapter 7 Bankruptcy to a Chapter 13 Case

Although most filers would prefer to file for Chapter 7, the court occasionally converts Chapter 7 cases to Chapter 13, and not everyone finishes in the bankruptcy chapter they started. Learn about voluntary and mandatory conversions and whether you'd be required to complete the converted Chapter 13 case.

Reasons to Convert From Chapter 7 to Chapter 13

Bankruptcy cases are usually converted from Chapter 7 to Chapter 13 for one of two reasons. Sometimes, the court informs filers that they earn too much to receive a Chapter 7 “discharge,” the order eliminating qualifying debts. In other cases, filers request the conversion after deciding Chapter 13 would be more advantageous than Chapter 7.

Court-Required Chapter 13 Conversion

A court will require you to convert to Chapter 13 if it determines that you aren’t eligible for a Chapter 7 discharge because of surplus earnings. This situation arises after a bankruptcy filing review reveals funds available to pay creditors in Chapter 13. The following are a few ways this might occur.

Chapter 7 means test. Mistakes can occur when determining income qualifications. The means test calculates Chapter 7 eligibility by analyzing whether you can afford to pay creditors a reasonable monthly payment through a Chapter 13 repayment plan.

If your gross income is higher than your state’s median, the second portion of the test allows you to deduct expenses. Because the second portion can be challenging, making a mistake by overreporting deductions is possible. For instance, you might inadvertently report a child’s total monthly schooling costs instead of the allowed portion. If recalculation results in a failed test, the court will convert your case to Chapter 13.

Schedule J: Your Expenses. This bankruptcy schedule lists your current monthly expenses. The Chapter 7 bankruptcy trustee will ask you to provide receipts if the schedule reveals higher than typical or newly incurred expenses. For instance, suppose the trustee finds your adult child’s $400 monthly allowance unreasonable, and the court agrees. The bankruptcy court will convert the case to Chapter 13 to allow the $400 to be paid to creditors.

Comparison of Schedule I: Your Income and Schedule J: Your Expenses. You must pay your monthly disposable income to creditors when it is enough for a reasonable monthly payment, and the bankruptcy court will convert your case to Chapter 13 if your current expenses are significantly lower than your current income. The court will determine this by reviewing the income and expense schedules showing your current income and budget. The court won't consider the means test because the calculations use past, not current, earnings.

Changed financial circumstances. If your financial situation changes—say you got a new job with a higher income—you must amend your petition to report the increase. The Chapter 7 trustee appointed to your case will also ask you about any financial changes at the 341 meeting of creditors. If you have additional disposable income significant enough to make a reasonable monthly creditor payment, the bankruptcy court will convert the case to Chapter 13.

Learn about questions the trustee asks at the 341 meeting.

Voluntary Chapter 13 Conversion

Sometimes, a filer determines it's best to convert from Chapter 7 to Chapter 13. This situation usually arises after learning the bankruptcy outcome will be negatively affected by an error or unfamiliarity with the Chapter 7 process.

Your property is worth more than estimated. Occasionally, filers learn they’ll lose valuable property they thought they'd keep. Perhaps the filer underestimated an asset’s value, and the trustee plans to sell it because a bankruptcy exemption doesn't fully protect it. Although bankruptcy courts usually don't dismiss Chapter 7 cases when creditors stand to receive funds, converting to Chapter 13 would be possible because it's designed to allow people to keep property they’d lose in Chapter 7.

You forgot to list a valuable asset. Suppose you didn't know to disclose a particular asset, such as the value of a whole life insurance policy. If a bankruptcy exemption wouldn’t cover it but you wanted to keep it intact, you could convert to Chapter 13 and pay its value to creditors over time.

You can discharge a debt in Chapter 13 only. Filers can eliminate some debts in Chapter 13 but not in Chapter 7. For example, an obligation to pay an ex-spouse for extra property received through a marital property settlement can't be discharged in Chapter 7. However, more debts can be discharged in Chapter 13, and a marital property division obligation is one of them.

When You Can’t Convert From Chapter 7 to Chapter 13

Some courts are reluctant to allow people to convert their cases if there is strong evidence that they’ve acted in bad faith. The circumstances in which this applies are very unusual, such as if a person was trying to hide significant assets only to be discovered by the Chapter 7 trustee. Repeatedly converting, dismissing, and refiling bankruptcy cases could also indicate a bad faith intent. This tactic sometimes uses the automatic stay to thwart foreclosure and other collection attempts.

How to Convert from Chapter 7 to Chapter 13

Many courts allow you to convert even if one of your creditors or the trustee objects. The process is relatively easy and involves the following:

• filing a motion asking for the court's permission
• sending the motion to creditors, the trustee, the U.S. Trustee, and other interested parties, and
• attending a short hearing.

Some courts will grant your request without a hearing if nobody objects to your motion. Your court might require you to follow additional rules, so review the local rules published on the court’s website or consult an attorney familiar with your court’s procedures.

It's worth noting that earning too much for Chapter 7 doesn’t automatically qualify you for Chapter 13. You must make enough to propose a Chapter 13 plan that the bankruptcy court will approve or “confirm.” Because being unable to pay the debts required in Chapter 13 isn’t unusual, consider trying a Chapter 13 calculator to help understand the amount you'd pay in Chapter 13.

How to Dismiss the Chapter 13 Conversion

If you convert your Chapter 7 case to Chapter 13—or even if the court converts it for you— and Chapter 13 isn’t for you, you can ask for a dismissal. The court can’t require you to stay in Chapter 13 because filers can't be forced to work to pay debts through a payment plan.

Consult a Bankruptcy Lawyer

It isn’t possible to anticipate all the issues that could arise from converting Chapter 7 to Chapter 13. A knowledgeable bankruptcy attorney will be in the best position to review your case and advise you of your options.