Sometimes after filing for Chapter 7 bankruptcy, you might decide that Chapter 13 is the better option. Or the court could require you to convert to Chapter 13 bankruptcy. Read on to learn about converting a Chapter 7 bankruptcy to a Chapter 13 case.
You can learn more about both chapters in Which Type of Bankruptcy Should You File? Chapter 7 vs. 13.
Most people prefer to file for Chapter 7. It’s easy to see why—it quickly wipes out qualifying debt and doesn’t require a Chapter 13 repayment plan. Even so, it can be necessary to convert to Chapter 13 after filing—sometimes voluntarily and sometimes by court order.
Court-Ordered Conversion to Chapter 13
A court will require you to convert to Chapter 13 if it determines that you are not eligible to file for Chapter 7. The most common reason is due to a mistake on the Chapter 7 means test.
The means test is a challenging mathematical calculation used to determine who is eligible for a Chapter 7 discharge—the order that wipes out debt. The means test analyzes whether you can afford to make a reasonable monthly payment toward your unsecured debts through a repayment plan. You aren’t eligible for a Chapter 7 if you fail the test. In most cases, your option will be to convert to Chapter 13—if you qualify. Not everyone makes enough income to pay the debts required in Chapter 13.
The court can’t force you to stay in a Chapter 13 case, however. You can ask the court to dismiss your case.
Voluntary Conversion to Chapter 13
It might be in your best interest to convert from a Chapter 7 to a Chapter 13. Your financial circumstances might have changed since you filed for Chapter 7. You might have realized that you’ll lose valuable property. Or you could realize that 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 situation has changed—say you got a new job with higher income—you might want to take advantage of some of Chapter 13's benefits. For instance, you can catch up on overdue mortgage payments or back payments on your car loan. Chapter 13 gives you more flexibility than Chapter 7. For instance, you might be able to remove a second mortgage on a house or reduce the principal on a car loan. Also, it will help you catch up on domestic support obligations because you must pay these obligations in full through your plan. Learn about these options by reading the articles under Chapter 13 Bankruptcy.
Your property is worth more than you thought. If you can’t exempt your property because you underestimated its worth, you might want to convert to Chapter 13 because it lets you keep your property. Learn how bankruptcy exemptions work in Chapter 7 bankruptcy.
You accidentally failed to list a valuable asset. You might have inadvertently failed to disclose a valuable asset. Perhaps 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 don'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 need to choose between converting or losing the asset you didn’t disclose in Chapter 7.
You can discharge a particular debt in Chapter 13 only. Some debts can only be wiped out in Chapter 13. For example, if you want to get rid of money owed as a result of a marital property settlement. Converting to Chapter 13 allows you to discharge more debts.
It is relatively easy to convert your case in most courts. Many courts say that you are entitled to convert, even if one of your creditors or the trustee objects.
You’ll need to do at least the following:
If nobody objects to your motion, some courts will grant your request without a hearing. 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 straightforward, there are some unusual circumstances in which the court will not permit you to convert to Chapter 13.
You don’t qualify for Chapter 13 bankruptcy. You need to be eligible to file a case under Chapter 13. While many people won’t have a problem with Chapter 13’s eligibility requirements, you could have too much debt or not enough stable 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 if a person was trying to hide significant assets only to be discovered by the Chapter 7 trustee.
You already converted your case from another chapter. The court might not grant your motion if the court converted your matter involuntarily to a Chapter 7. If your case was previously converted 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 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 to prepare for the additional steps well before you ask the court to convert your Chapter 7 case to Chapter 13.