What happens when you Convert from Chapter 13 to Chapter 7 Bankruptcy

Many people know the basic differences between Chapter 7 and Chapter 13 bankruptcy. Sometimes the choice is clear because the consumer isn’t eligible for Chapter 7 or they need Chapter 13 to pay for back mortgage payments. However, there are times when a consumer will start with a Chapter 13 but later needs to switch, or convert, to a Chapter 7. The most common reasons to convert are either a change in financial circumstances making it hard to make the payments or the consumer no longer wants to keep property that was protected by the bankruptcy (like a house or car.) A debtor has a right to convert to Chapter 7, unless she has received a Chapter 7 discharge within the previous eight years.

Another thing that happens sometimes is the court forcing a debtor to convert from Chapter 13 to Chapter 7. However, the bankruptcy court can convert a case involuntarily only “for cause.” Sometimes this comes from the debtor who has failed to file a Chapter 13 plan on time, failed to make Chapter 13 plan payments on time, or there has been an unreasonable delay that causes harm to the creditors.

There are specific procedures that must be followed to successfully convert from Chapter 13 to Chapter 7. Often, there may be some amendments that need to be made to the bankruptcy schedules. There is also a form called the Statement of Intention that needs to be filled out correctly and filed. Another unpleasant aspect of a conversion is that the debtor will have to attend another Meeting of Creditors at the courthouse. But this is a small price to pay to get rid of a lot of debt.

The inner workings of a bankruptcy can be very complicated and the law changes all the time. In fact, earlier this year the U.S. Supreme Court decided a case that affects people who convert from a Chapter 13 to a Chapter 7. In that case, the debtor, Mr. Harris, filed a Chapter 13 bankruptcy and the plan was later confirmed. After a while, Mr. Harris fell behind on his mortgage payments that he was making outside of his bankruptcy. Then he lost his home in foreclosure. Later, when Mr. Harris converted to Chapter 7, the trustee still had over $5,000 of undistributed funds. Over a week after the conversion, the trustee distributed the funds to Mr. Harris’s creditors.

In the past, different courts handled this situation differently. Now, the Supreme Court has ruled that any undistributed funds on the date of conversion to Chapter 7 belong to the debtor. The Court decided this way because the Chapter 7 bankruptcy estate does not include post-petition earnings. When a debtor converts to Chapter 7, the “bankruptcy estate” consists of all assets that the debtor had when she filed the original Chapter 13. Therefore, in the Chapter 7, those funds should be returned to the debtor.  This case is an important victory for debtors because it allows them to keep money that would otherwise be lost to creditors.

The complicated nature of Chapter 13 and Chapter 7 bankruptcies mixed with the constantly changing laws make it crucial to have a good Sacramento bankruptcy lawyer.

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