Life inevitably changes and things happen that may cause a chapter 13 debtor to no longer need or afford their original chapter 13 plan. A job loss, other reduction of income or unanticipated increase in expenses can all be reasons for a debtor to lose their ability to continue making the chapter 13 plan payments. If the chapter 13 payments become unfeasible and, assuming the debtor qualifies, a chapter 13 case can be converted to chapter 7 for an immediate discharge.
Typically people file chapter 13 bankruptcy for one of two reasons: Either their household income is above the applicable state median income and they do not qualify for chapter 7, or they voluntarily elect to file chapter 13 due to having mortgage arrears, non-dischargeable taxes or other priority debts that can be repaid over the course of a chapter 13 plan. Also debtors may elect to file chapter 13 if they have non-exempt assets that would lose to liquidation by a chapter 7 trustee and instead chose to ‘buy back’ their non-exempt property by making monthly plan payments in chapter 13.
In cases converted to chapter 7 from chapter 13, the debtor must prove that they would qualify for chapter 7 as of the date of conversion (not the original file date) by passing the means test. See What is the “Means Test” and Why Does it Matter in Bankruptcy. The debtor’s bankruptcy attorney will complete a new means test as of the date of conversion to determine if the debtor is chapter 7 eligible. If eligible, the case can be converted by the debtor filing a motion to convert to chapter 7 which gives all creditors and other parties the opportunity to object. (Note that in Minnesota, no motion is required and the debtor can instead file a simple request to convert to chapter 7 along with updated schedules and statements). If the motion/request to convert is granted, the case will proceed as a chapter 7 case and the debtor will attend a chapter 7 Meeting of Creditors before a discharge is ordered.
If your income has gone down or your expenses have increased since your chapter 13 plan was confirmed, you should consult your bankruptcy attorney so she can advise you of what options you have to convert to chapter 7, to have your case dismissed voluntarily or otherwise to modify your chapter 13 plan to reduce the plan payment. Any missed chapter 13 plan payments will result in a quick dismissal of your chapter 13 case so it is important to notify your attorney immediately if you are considering a conversion to chapter 7 from chapter 13. Once a chapter 13 case is dismissed, the debtor will have to pay a significantly larger filing fee to file chapter 7 and also increased attorney fees over the typically smaller attorney fee for just a conversion.
Read more about converting from chapter 7 to chapter 13 bankruptcy here.
Conversion to Chapter 13 from Chapter 7 isn’t a death sentence for your bankruptcy case (see Chapter 13: Not Always a Gloomy Diagnosis in Bankruptcy). Perhaps a Chapter 7 was filed underestimating your income and you didn’t actually qualify for Chapter 7 for this reason. Or perhaps you realize after filing your Chapter 7 that you have mortgage arrears that you wish to repay in order to save your home from foreclosure, which is something that you cannot do in Chapter 7. Or perhaps you discover after already filing Chapter 7 that you have non-exempt assets which you would rather ‘pay to keep’ in Chapter 13 rather than turn over to the Chapter 7 trustee for immediate liquidation. Also, conversion can arise when the Office of the United States Trustee brings a motion to dismiss your Chapter 7 case for abuse, usually citing that you did not qualify for Chapter 7 from the beginning. While converting to Chapter 13 is neither an everyday experience nor a great risk for the average debtor, it can arise and ideally your attorney has already explained the differences between Chapter 13 and Chapter 7.
What can you expect if you convert to Chapter 7 from Chapter 13:
- File and sign new petition forms and amended schedules required for the verified conversion.
- Formulate a Chapter 13 plan with your attorney. The plan will propose a monthly Chapter 13 payment to commence about one month after the conversion is filed and continue for three to five years. From this payment, mortgage arrears and priority tax claims can be paid off over three to five years, vehicle loans may be crammed down to the value of the vehicle rather than the pre-petition balance of the loan, and other terms can be written into your plan that are more versatile than can be achieved in Chapter 7.
- Attendance at the Chapter 13 Meeting of Creditors. You will need to attend a Meeting of Creditors with the Chapter 13 trustee even if you have already attended a Chapter 7 Meeting of Creditors.
- Additional attorney fees. Chapter 13 almost always costs more than Chapter 7, in large part due to the attorney work necessary to formulate a Chapter 13 plan and for the fact that your bankruptcy attorney continues to represent you throughout the entire three to five-year Chapter 13 plan (versus the few months in which a Chapter 7 bankruptcy is usually completed). Many times, these fees can be paid in large part ‘through the plan’, which means the attorney fees are paid over time through the monthly plan payments you make to the Chapter 13 trustee.
Unless you recognize a change in circumstances where you voluntarily wish to convert your case, your attorney will also apprise you of any event arising in your Chapter 7 case which may require conversion to Chapter 13.
For more information on how to convert your case from Chapter 7 to Chapter 13, contact Wartchow Law Office for a free bankruptcy consultation. Located in Edina, Minnesota, Wartchow Law represents clients in all forms of bankruptcy throughout the Minneapolis and St. Paul metro area of Minnesota.
Unlike under other Chapters of the Bankruptcy Code, Chapter 11 is unique in that there is no initial appointment of a trustee. In contrast, an independent trustee is appointed in a Chapter 7 business bankruptcy to manage the business operations if the business is still operational and effectuate an orderly liquidation. However in Chapter 11 where the intent of the bankruptcy proceeding is to reorganize, having an independent trustee manage the business operations is often expensive, unnecessary and even counterproductive to the reorganization process. After all, the principals of a business are usually the best suited to run their own business and continuity of current management typically minimizes overhead costs, best maintains vendor and client relationships and operates the business in its most efficient manner. The appointment of a trustee in a Chapter 11 case can be akin to a death sentence if the trustee appointed decides to unseat the current management or principals and/or to convert the business to Chapter 7 liquidation.
While somewhat uncommon here in Minnesota, a Chapter 11 bankruptcy trustee or examiner can be appointed under specific circumstances, usually when the principals of a Chapter 11 debtor have utterly mismanaged the debtor’s finances and business. The appointment of a trustee or examiner in a Chapter 11 business reorganization must be made by request of a party in interest—usually that party is the attorney for the United States trustee—and must be based on one of the grounds recognized under the Bankruptcy Code, including for fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case. Appointment of a trustee in a Chapter 11 case is an extraordinary consequence and generally should be avoided. The best plan to avoid the appointment of a trustee in Chapter 11 is to follow the rules and procedure, read and observe the Operating Guidelines and Reporting Requirements of the U.S. Trustee (as well as follow all Reporting and Other Requirements in Chapter 11), and always ask your Chapter 11 attorney before doing anything that may be outside the ordinary course of business.
Lynn Wartchow is a Minnesota Chapter 11 attorney advising business clients on their options and Chapter 11 solutions to keep a business operating and improve future prospects. Located in Edina, Minnesota, Wartchow Law Office represents clients throughout Minneapolis, St. Paul and surrounding areas in Minnesota.