Converting from Chapter 7 to Chapter 13 Bankruptcy

Although much less common than converting from chapter 13 to chapter 7, many debtors with regular income automatically convert their bankruptcy case from chapter 7 to chapter 13. If any doubt exists as to whether the debtor passes the Means Test, a creditor, chapter 7 trustee or the United States Trustee may file a section 707(b) objection to the complete discharge of most types of unsecured debt allowed in chapter 7. (The United States Trustee frequently files Statements of Presumed Abuse which shifts the burden of proof as to compliance with the Means Test upon the debtor(s). The United States Trustee will subsequently file a declination statement if this burden is met.) Conversion to chapter 13 will resolve any 707(b) problems and avoid this objection. As an Aurora individual bankruptcy lawyer, I will make sure that you have all pertinent information before making a decision to convert chapters.

The Means Test operates to mandate that a debtor with high enough income pay back at least a portion of unsecured debt (the exact percentage of which depends on the debtor’s combined household income, allowed expenses and number of household members for the six months preceding the month in which the bankruptcy is filed).

Conversely, you need to show in chapter 13 that you have enough monthly disposable income to make plan payments to the trustee and creditors. Your monthly income must exceed your allowed monthly expenses to be eligible for such a wage earner plan and unsecured creditors will be paid anywhere from 0% to 100% in the plan. Also, your unsecured debt (as of 2011) cannot exceed $360,475 in order to be eligible for chapter 13 relief. (There are no unsecured debt limits in chapter 7 bankruptcy.)

A debtor may also need to pay past due debts in a chapter 13 repayment plan. If the debtor intends to catch up on monthly mortgage or car payments but falls behind (particularly if it’s likely the lender will file a Motion to Relief from Automatic Stay), or even rent payments to a landlord or past due child support payment, any lawsuit to foreclose upon or repossess collateral can be stopped and arrears can be paid off interest free in chapter 13 over 3 to 5 years. Other debtors who face collection activity initiated by the IRS or State of Colorado such as a lien, levy or wage garnishment can pay back the past due taxes, interest and penalties without the further accrual of interest and penalties starting on the date of conversion.

The automatic right allowed by the Bankruptcy Code to convert from one chapter of bankruptcy to another is only allowed once. If you convert from chapter 7 to chapter 13 and then bank to chapter 13, creditors or the trustee have the right to object (upon receiving proper notice) and the court must be convinced that such a re-conversion is in the best interests of your creditors.

Within 30 days of the Motion to Convert and court notice of the conversion and new 341 meeting of creditors before a chapter 13 trustee, the first plan payment must be made to the chapter 13 trustee failure of which may lead to dismissal of the case.