The decision to file a Chapter 13 case may be an easier one if you know that you can always change it into a Chapter 7 one if needed.
Here’s the sentence that we’re explaining today:
If you file a Chapter 13 “adjustment of debts” case you can always “convert” it into a Chapter 7 “straight bankruptcy” one, either intentionally because of changed circumstances or because you couldn’t successfully complete the Chapter 13 payment plan.
Filing under Chapter 13
As we said in our last blog post, the focus of a Chapter 13 case is to pay some of your creditors—especially some very important ones that you want or need to pay—while being protected from all your creditors. The important creditors that you may want or need to pay could be your home mortgage holder or vehicle lender to catch up on an arrearage to be able to keep the home or vehicle, the IRS or state to pay income taxes that can’t be written off, or your ex-spouse or support enforcement agency to catch up on child/spousal support.
There are many reasons for choosing the file a Chapter 13 case instead of the much quicker and usually simpler Chapter 7 procedure. Besides being able to pay special creditors, Chapter 13 allows you do many things Chapter 7 doesn’t, including the possibility of reducing your vehicle loan payment and total amount to be paid, “stripping” a second or third mortgage from your home’s title, and “discharging” a non-support debt arising from your divorce decree.
You would generally file a Chapter 13 case because its many advantages outweigh its detriments—mostly how long it takes, but also the risk that you may not complete it as you originally intended.
Filing under Chapter 7
The focus of the Chapter 7 version of bankruptcy is a quick financial fresh start. In many situations it’s the quickest and easiest way to get relief from either all or most of your creditors.
Filing a Chapter 7 case immediately stops the repossession of a vehicle, foreclosure of a home, almost all wage and bank account garnishments, and virtually all other debt collection activity against you, your income, and your assets. And then usually within a few months most or all of your debts are permanently discharged—legally written off.
But its quickness can actually be a disadvantage if you have debts you can’t or don’t want to discharge, and need to or want to pay, such as the ones mentioned in the above section about Chapter 13. A Chapter 7 case lasts only 3 or 4 months, and so the protection from creditors’ collection actions lasts only that long. That’s fine with debts that are discharged, because those debts are permanently gone and their creditors are forbidden from trying ever again to collect on them. But with debts you must still pay—such as income taxes of the last several tax years—or debts you want to catch up on—such as a mortgage arrearage—the extended protection of Chapter 13 may make much more sense.
“Conversion” from Chapter 7 to 13
Following up on my last blog post, “conversion” means switching from one chapter of bankruptcy to another before the case is completed. Last time we discussed converting from Chapter 7 to 13, and now the other way around.
The reasons to convert from Chapter 13 to Chapter 7 are similar to those for converting in the opposite direction, what could be called intentional and unintentional reasons. Either:
1) changed circumstances now make Chapter 7 the better option for you, or
2) you can’t complete your Chapter 13 payment plan, or amend it in a way that it can be completed under new terms, and so are induced to convert into Chapter 7 even if you would have preferred finishing the Chapter 13 case.
Converting because Chapter 7 Becomes Better than Chapter 13
Bankruptcy law makes converting from Chapter 13 to 7 very easy. Under Section 1307(a) of the Bankruptcy Code, a “debtor may convert a case under this chapter  to a case under chapter 7… at any time.” Chapter 13 cases are converted to Chapter 7 because of changed circumstances much more than the other way around for the simple reason that a Chapter 13 case usually lasts much longer, so there’s much more time for circumstances to change. Many more things can happen to change your financial circumstances during the 3 to 5 years of a typical Chapter 13 case, versus the 3-4 months of a typical Chapter 7 case.
Some examples of changes in circumstances that could result in you wanting to convert to Chapter 7:
- You file a Chapter 13 case because you have relatively good income, but you convert to Chapter 7 when your income is reduced when you lose your job and make less money at a new one. You may have even been forced to file a Chapter 13 case because your income had been too high to pass the “means test,” and converting to Chapter 7 may save you lots of money get you out of bankruptcy years earlier.
- You file a Chapter 13 case in order to pay the arrearage on a home mortgage, but you convert to Chapter 7 when you get a job in another state and it no longer makes financial sense to catch up on the mortgage arrearage.
- You file a Chapter 13 case in large part to get relief from student loans, and then during that case you get disabled or otherwise qualify for an “undue hardship” discharge of those student loans.
In these and many other possible situations, if you otherwise qualify for Chapter 7 (under the “means test” especially) you would almost certainly be allowed to convert your Chapter 13 case into a Chapter 7 one.
Converting Because Chapter 7 is Better than No Bankruptcy
Although a huge majority of Chapter 7 cases are completed successfully, the completion rate for Chapter 13s is much lower. That’s partly because Chapter 13s are much longer—giving more time for circumstances to change and sometimes not go as well as hoped—and also because Chapter 13s have a lot more going on that can change or go wrong.
Section 1307(c) and (d) list twelve different reasons that a court can either dismiss a Chapter 13 case or convert it into a Chapter 7 case, “whichever is in the best interest of creditors and the estate.” Practically speaking, usually you have the opportunity to convert to Chapter 7 before the Chapter 13 case is dismissed, or thrown out, by the court. The most common reasons for not completing a Chapter 13 case include the debtor’s inability to:
- propose a Chapter 13 plan on time
- have a plan get approved by the bankruptcy court within the time allowed
- make the payments to the Chapter 13 trustee as required under the terms of the court-approved plan
- make any payments directly to the creditors as provided under the plan
- complete any other provision of the court-approved plan
- pay any ongoing child or spousal support payments during the length of the case
- file tax returns as they become due throughout the case
If you encounter any of these problems during your Chapter 13 case you’ll usually have the opportunity to fix these, including by proposing an amended payment plan. There may be other options like dismissing the Chapter 13 case and starting over with a new one, or a “hardship discharge.” But sometimes the best alternative is to switch gears and convert to Chapter 7. The most important benefit is that you would usually get a discharge of all or most of your debts, which would not happen if a Chapter 13 case was dismissed before it was completed.