You may be thinking about converting a Chapter 13 to Chapter 7. This is a common questions when your Chapter 13 payments are too high. A Chapter 13 bankruptcy plan could take three to five years to complete. During that time, a debtor (the person who filed the bankruptcy case) could experience another financial hardship that makes it impossible to pay the Chapter 13 plan payments.
If you are unable to pay your Chapter 13 payments, you might want to consider converting your Chapter 13 case to a Chapter 7 case. However, converting to Chapter 7 could have negative consequences. In this blog, we answer some FAQs about converting from Chapter 13 to Chapter 7.
Everything to Know About Converting from Chapter 13 to Chapter 7
How long do you have to convert from Chapter 13 to Chapter 7?
There is no deadline for converting a Chapter 13 case to a Chapter 7 case. You can petition the court to convert your Chapter 13 to Chapter 7 at any time during your bankruptcy case. If you are almost finished with your Chapter 13 plan, you may want to consider staying in the Chapter 13 case.
Do I qualify to convert to Chapter 7 from Chapter 13?
You must demonstrate that you are unable to pay your Chapter 13 payments to convert to a Chapter 7 case. While you may not be required to complete another Means Test, you are required to file amended bankruptcy schedules reporting your current income and expenses. If your disposable income is above a certain amount, you may not qualify to convert to Chapter 7.
Is there a fee for converting to Chapter 7 from Chapter 13?
The filing fee for a Chapter 13 case is less than the filing fee for a Chapter 7 case. Therefore, you are required to pay the additional filing fee for conversion. The fee should be $25 to convert a Chapter 13 to a Chapter 7 case, unless the filing fees for bankruptcy cases increase. You should always check with the bankruptcy court in your state to determine filing fees for various petitions and motions, including a motion to convert Chapter 13 to Chapter 7.
Will I lose property if I convert to Chapter 7?
Your property could be at risk if you convert to Chapter 7. A careful analysis of the bankruptcy exemptions claimed in your Chapter 13 is required to determine if you have equity in assets that is not protected by bankruptcy exemptions.
Non-exempt equity in assets could result in the loss of property in Chapter 7. The Chapter 7 trustee sells a debtor’s property and uses the money to pay toward the debtor’s unsecured debts. Bankruptcy exemptions vary by state. Some states use federal bankruptcy exemptions, but other states have state-specific exemptions that debtors must use.
Nolo has an article that discusses state bankruptcy exemptions. Remember, this discussion is not legal advice. It would be wise to consult a bankruptcy attorney before converting to Chapter 7.
What happens to my secured debts in a converted Chapter 7?
Secured creditors have a lien on property that secures the money you owe to the creditor. If you do not pay the debt payments, a secured creditor may repossess or foreclose to sell the collateral. Examples of secured debt include mortgages and car title loans. A bankruptcy does not get rid of secured liens.
If you convert to Chapter 7, you must continue to pay secured debts or lose the property. If you are behind on your mortgage payments, you need to catch up on the mortgage payments immediately or work with your mortgage company to avoid foreclosure. Unless you can catch up the mortgage payments, you might not be able to avoid losing your home in Chapter 7.
Your car loan could also be a problem. Most Chapter 13 plans “cram down” auto loans to reduce the amount owed on the secured debt. In most cases, the auto loan goes into default when you convert to Chapter 7. If you are not prepared to catch up on the auto loan, you could lose your vehicle.
What happens to my unsecured debts after I convert to Chapter 7?
Unsecured debts that are eligible for a bankruptcy discharge (forgiveness of debt in bankruptcy) are eliminated in the Chapter 7 case. Examples of dischargeable debts include credit card debts, medical bills, some old income taxes, personal loans, some judgments, and old utility bills. If a debt is not dischargeable, the debt survives the Chapter 7 case, meaning you owe the debt even though you receive a discharge in Chapter 7.
Examples of non-dischargeable debts include alimony, child support, restitution, most taxes, most student loans, and debts owed to the government. We discuss how to handle back taxes in bankruptcy and student loan hardship discharges in further detail in our bankruptcy blog.
How long does it take to receive my bankruptcy discharge when I convert to Chapter 7?
If the Chapter 7 trustee abandons all property (does not sell any property), the case is referred to as a no-asset Chapter 7. A typical no-asset Chapter 7 case can be completed in about four to six months after converting from Chapter 13. Remember, you must complete your Debtor Education Course, if you have not done so in your Chapter 13 case, to receive a bankruptcy discharge.
Pros and Cons of Converting Chapter 13 to Chapter 7
There are pros and cons of converting a Chapter 13 to Chapter 7. Before converting to Chapter 7, you should weigh all options for debt relief. In some cases, you might be able to lower your Chapter 13 payments or dismiss your Chapter 13 case and resolve your debt problems outside of bankruptcy.
Before doing anything, it is strongly recommended that you talk to your bankruptcy attorney before you stop making your Chapter 13 payments or take any actions regarding your bankruptcy case.
If you are trying to decide whether to file for bankruptcy relief, Ascend can help. We let you compare various debt-relief options, including Chapter 7, Chapter 13, and debt settlement. Before you decide on a specific debt relief option, let Ascend help you explore all options to find the option that works best for you.