Converting from Chapter 7 Bankruptcy to a Chapter 13 Bankruptcy: Can You (and Should You) Switch?

Most individuals file for bankruptcy under Chapter 7 of the United States Bankruptcy Code.  In some circumstances, converting a Chapter 7 bankruptcy to a Chapter 13 bankruptcy provides benefits for the debtor.  Switching from one type to the other raises two essential questions:  Do you have a right to switch from Chapter 7 to Chapter 13?  When should you consider switching from Chapter 7 to Chapter 13?

Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Chapter 7 of the Bankruptcy Code provides debtors with a “fresh start” by discharging most debts.  The debtor gives up non-exempt assets for liquidation. Specific eligibility criteria apply to filing for Chapter 7 bankruptcy.

In contrast, Chapter 13 bankruptcy enables debtors to set up a three- to five-year payment plan for paying off debts.  Referred to as a “wage earner’s plan,” Chapter 13 provides a way for the debtor to keep his or her property and assets.  This type of bankruptcy is available to debtors with regular income.

A major difference between Chapter 7 and Chapter 13 is the length of time it takes to complete.  Most Chapter 7 cases conclude within three to four months, although some cases do take longer.  In contrast, the payment period under Chapter 13 lasts for up to five years.

Reasons for Conversion from Chapter 7 to Chapter 13 Bankruptcy

Several different situations can arise that make a switch from Chapter 7 to Chapter 13 advisable for the debtor.  In specific circumstances, the bankruptcy court may order a debtor to convert.

Debtors sometimes realize after filing a Chapter 7 case that Chapter 13 offers a better choice in their circumstances.  In these cases, the debtor may benefit from voluntarily converting the bankruptcy.  Examples of situations when this occurs include a debtor who:

  • Inadvertently failed to disclose an important asset in the Chapter 7 filing;
  • Did not understand accurately what debts the Chapter 7 bankruptcy discharge covers; or
  • Underestimated the value of assets and discovers that the exemption does not cover all of the property that debtor wants to keep; or
  • Experiences a sudden change in the debtor’s financial circumstances — such as receiving an unexpected inheritance or getting a job — triggers eligibility for Chapter 13.

In any of these circumstances, converting to Chapter 13 may be a better option than proceeding with your Chapter 7 case.

Chapter 13 offers debtors more ways to preserve assets than Chapter 7.  If your circumstances provide the opportunity to switch from Chapter 7 to Chapter 13, discussing your case with an experienced bankruptcy attorney is in your best interest.

Since Chapter 7 cases move quickly, your opportunity to convert exists only for a short time.  If any of these situations arise in your Chapter 7 bankruptcy case, you should talk with an attorney as soon as possible.

Finally, if a debtor makes a mistake in the Chapter 7 petition — usually in calculating eligibility under the means test — the bankruptcy court has the authority to order conversion to Chapter 13.  Such errors rarely occur if a bankruptcy attorney represents the debtor, but they can occur if a debtor files a petition without consulting with an attorney.  The bankruptcy court also may order a debtor to switch from Chapter 7 to Chapter 13 if the court determines that the debtor’s income is sufficient to repay creditors.

Does a Debtor Have an Absolute Right to Switch a Chapter 7 Bankruptcy to a Chapter 13 Bankruptcy?

The provisions of Section 706(a) of the Bankruptcy Code permit debtors to convert a Chapter 7 case into a Chapter 13 case.  However, the debtor cannot convert if the Chapter 7 case previously was converted from a case filed under a different chapter on request of a creditor, the trustee, or the bankruptcy court. In that case, the law prevents the debtor from converting to Chapter 13.  

To convert a Chapter 7 case to Chapter 13, the debtor must meet the eligibility requirements for filing a Chapter 13 case.  That includes having enough income to repay creditors under a payment plan.

An additional requirement applies to converting a bankruptcy case.   A decision of the United States Supreme Court imposes a good faith requirement on a conversion request.  If a debtor seeks conversion in bad faith, the bankruptcy court can deny a request to convert.  This issue arises in unusual circumstances, such as a debtor who attempts to hide major assets during a Chapter 7 case.

Generally, a debtor can convert a bankruptcy case one time with court approval.  Subsequent conversions require approval of the bankruptcy court.  Most bankruptcy courts do not permit switching back and forth multiple times, so the decision to convert a bankruptcy case is not one to make without careful consideration.

Process for Converting Chapter 7 to Chapter 13

The process for converting a Chapter 7 bankruptcy to a Chapter 13 bankruptcy is straightforward.  Generally, it begins with filing a motion with the bankruptcy court.

The debtor sends a copy of the motion to creditors, the trustee, the U.S. Trustee, and any other interested parties.  Then, the bankruptcy court holds a brief hearing before ruling on the motion. 

Even though the process for switching is relatively simple, converting does require preparation and planning.  That is especially true because the debtor needs to file a Chapter 13 payment plan, and payments begin soon after the court approves the conversion.

If you filed for Chapter 7 bankruptcy without the assistance of an attorney and want to consider converting to Chapter 13, consulting with an experienced bankruptcy attorney is critical.  Attempting to navigate a bankruptcy conversion on your own creates a situation with many potential pitfalls.

Talk With an Experienced Burr Ridge, Illinois Bankruptcy Attorney

At Modestas Law Offices, we assist clients with Chapter 7 and Chapter 13 bankruptcy, as well as Chapter 7 to Chapter 13 conversions.  We serve clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends.

Contact us to schedule your initial free consultation.

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