Converting to Chapter 13 Bankruptcy
It is possible to switch from Chapter 7 to Chapter 13 bankruptcy after you’ve already filed? Yes, assuming you’re acting in good faith. For example, converting your case might make sense if you have fallen behind on mortgage payments, and risk losing your home to foreclosure. Chapter 7 bankruptcy is a very effective way of eliminating credit card debt, medical bills and other unsecured debt. Chapter 7 does not alter your secured debts. You will still be obligated to make mortgage and car payments even after you have received a formal bankruptcy discharge.
Conversion Could Help Address Mortgage Troubles
If your chapter 7 case is pending and you realize that the monthly mortgage payment is going to be too much, converting to a Chapter 13 plan will allow you time to get caught up on the arrearages.
Retaining Non-Exempt Assets
Chapter 13 bankruptcy is also advantageous for those who have significant ‘non-exempt’ assets. For example, in North Carolina a married couple filing jointly can protect up to $70,000 of equity in their home. If a married couple has filed a chapter 7 mistakenly believing they have little or no equity in their home only to find out there is $90,000 of equity, they may convert to a chapter 13 and pay out the value of that non exempt equity ($20,000) over time rather than having the trustee sell the home to satisfy creditor’s claims. Please note that in this example the couple would also have the option of paying to the trustee the $20,000 (or a negotiated sum) in a lump sum payment to prevent the home being sold.
How Often Can You Convert a Bankruptcy Case?
It is important to understand that a debtor can only convert once without court approval, and due to a recent Supreme Court decision, the conversion must be in good faith. On its face, section 706(a) of the Bankruptcy Code would appear to allow for conversion at will.
Not so says the Supreme Court in Marrama vs. Citizens Bank of Massachusetts, a decision in which the court creates a good faith standard to be read into section 706(a). The debtor in Marrama failed to disclose his ownership interest in real estate he owned in Maine. When the trustee became aware of the property and tried to sell it, the debtor attempted to convert his case to a chapter 13 with the hope of protecting the property. The Court found that his nondisclosure was intentional, that the conversion was therefore in bad faith, and the motion was denied.
Erik Clark is one of the leading bankruptcy attorneys in Southern California who has had the privilege of representing thousands of clients in chapter 7 and chapter 13 bankruptcy cases in the Los Angeles area. Erik has served as the past President of the National Consumer Bankruptcy Litigation Center (NCBLC) and the American Consumer Bankruptcy College (ACBC). His firm, Borowitz & Clark, is committed to using bankruptcy law as a tool for social justice and was one of the first consumer law firms to join the Law Firm Antiracism Alliance.