Changing from a Chapter 13 to a Chapter 7 is possible and can be beneficial
Image source: Flickr Creative Commons User Tracy Ruggles
Chapter 13 and Chapter 7 bankruptcies differ substantially. In a Chapter 7, you have most of your unsecured debts discharged and if you have secured debts you are behind on, the property can be relinquished and that debt wiped out as well. By contrast, a Chapter 13 buys you time to catch up on your bills, usually a mortgage, car loan and other secured debts, and will pay some of your unsecured debts and wipe out remaining balances on others after you complete your repayment plan.
More than half of Chapter 13 bankruptcy repayment plans do not make it to completion and receive a discharge. We see this happen most often when the financial situation of the debtor deteriorates and they are unable to maintain their repayment plan. Chapter 13 can be a challenge because it demands that most all of your disposable income go toward the debt.
But another reason that Chapter 13 bankruptcies can fail is that a Chapter 7 was a better fit but the debtor wanted to try and hang on to a home they couldn't afford or just didn't feel comfortable with a Chapter 7 because they wanted to try and repay their debts. Fortunately, for those that either realize they can't keep up with their repayment plan or who realize that they need the more complete relief a Chapter 7 offers, there is an option to convert your Chapter 13 to a Chapter 7 in some cases.
Here are the circumstances where it's possible to convert a Chapter 13 to Chapter 7:
(1) Your Chapter 13 hasn't already been dismissed for non-payment
(2) You can pass the Chapter 7 bankruptcy means test (if required)
(3) You must not have a Chapter 7 discharge within the last eight years
(4) The court can force you to convert if they think you're abusing the system
Here's how to convert your Chapter 13 to Chapter 7:
(1) Notify your bankruptcy attorney so they will prepare the paperwork
(2) Pay a modest conversion fee when the conversion request is filed
(3) Attend a new 341 meeting of creditors
(4) Be prepared to explain any change in financial circumstances
There are also some things to be aware of when you're converting from Chapter 13 to Chapter 7 that you need to understand before you decide on this option because it can't be undone.
(1) If your Chapter 13 included a cramdown on a car loan, converting will invalidate this and your loan will revert to its pre-Chapter 13 status
(2) If your Chapter 13 included the lien stripping of a second mortgage, this will also be reinstated when you convert – if you're surrendering your home, this won't cause a problem, but if you're trying to keep it, you'll be behind on this debt
(3) If you had secured debts you were behind on, whether it was car, mortgage or other, these will be treated as if the Chapter 13 had never happened and you'll have to surrender the property, bring payments current, reaffirm the debt with the lender or make a payoff arrangement with the creditor
If you're deep in debt and looking for a solution, bankruptcy may be a fit depending on your income, debts and financial circumstances. Contact the law offices of John T Orcutt for a free consultation on your debt dilemma to discuss Chapter 7, Chapter 13 and which is the best fit for your finances and family.