When deciding between Chapter 7 and 13, if you choose a Chapter 13 payment plan realize that converting later to Chapter 7 is an option.
Chapter 13—Powerful But Comes with Risks
Chapter 13 is a powerful tool. If you have certain special kinds of debts it can help you with those debts in amazing ways. It can enable you to save your home or vehicle, sometimes by reducing how much you need to pay monthly. In some circumstances it reduces what you need to pay on these debts altogether. Chapter 13 gives you power over income tax debts, child and spousal support arrearage, student loans, other obligations against your home, other secured debts, and certain other kinds of debts.
But Chapter 13 also requires a long-term commitment. The payment plan that you and your attorney propose requires looking into the future. It requires predicting your income and expenses for the following 3 to 5 years. It’s more challenging if your income and expenses don’t stay somewhat steady during that time. Life often doesn’t go as expected or hoped.
The advantages of Chapter 13 may make sense but they often do involve some risk.
To qualify for Chapter 13 you must be an “individual with regular income.” This means that your “income is sufficiently stable and regular to enable [you] to make payments under a [Chapter 13] plan.” (See Sections 109(e) and 101(30) of the U.S. Bankruptcy Code.) This requirement of a “stable and regular” income is a broader than it may sound. But it does require you and your bankruptcy lawyer predict your income for the life of your payment plan.
Your bankruptcy court will tend to give you a chance to demonstrate that your income is stable enough for Chapter 13. As long as you have reasonable justification, you are usually given the opportunity to see if you can make the payments you are proposing.
So you may appropriately decide to file a Chapter 13 case to take advantage of its unique powers. But then your income may not end up meeting your expectations, or your expenses may unexpectedly increase. So down the line you may not be able to pay into your Chapter 13 payment plan as you had expected.
You may be able to amend, or “modify” your plan to deal with such financial changes. But that may not always work. Knowing that Chapter 7 is available as a fallback option can be reassuring when deciding to file under Chapter 13.
The Right to Convert to Chapter 7
The Bankruptcy Code explicitly states in Section 1307(a) that a Chapter 13
debtor may convert a case under this chapter to a case under chapter 7 of this title at any time. Any waiver of the right to convert under this subsection is unenforceable.
So, at any point in your Chapter 13 you can switch it into a Chapter 7 one.
However, there are some rather rare situations in which conversion is not so easy. If the bankruptcy court believes that the bankruptcy laws are being abused, conversion may not be allowed. Again, this is rare. Talk with an experienced bankruptcy lawyer about whether and how this might ever apply to you. In general you can assume that you can switch to a Chapter 7 case “at any time.”
The Conversion-to-Chapter 7 Option
Our last blog post discussed some of the disadvantages of voluntarily ending, or dismissing, a Chapter 13 case. You immediately lose protection from creditor collection activities and your debts are not discharged (legally written off).
Conversion to Chapter 7 avoids those disadvantages. The protection from creditors—the “automatic stay”—continues from the prior Chapter 13 case without a break into the new Chapter 7 case. And at the end of the Chapter 7 case, usually about three months after the conversion, most of your debts get discharged.
So, conversion to Chapter 7 can be a decent back-up plan if your circumstances or goals change. As you’re considering the Chapter 13 option, it’s good to know you can later convert into a Chapter 7 case if necessary.