Bankruptcy

Converting a Chapter 13 to Chapter 7

By July 27, 2017 No Comments

A Chapter 13 bankruptcy filing may be converted into a Chapter 7 bankruptcy filing. One common reason for converting from Chapter 13 to Chapter 7 is a petitioner’s inability to stay current in the Chapter 13 repayment plan. A petitioner may not convert a Chapter 13 to a Chapter 7 if the petitioner has already received a Chapter 7 discharge within the previous eight years.

A Chapter 7 bankruptcy does not involve the filing of a plan of repayment as in a Chapter 13 case. Rather, a Chapter 7 case involves the bankruptcy trustee gathering and selling the debtor’s nonexempt assets, from which creditors will receive distributions in accordance with the provisions of the Bankruptcy Code. Part of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors.

In a Chapter 7 bankruptcy, unlike a Chapter 13 bankruptcy, the petitioner is required to give all nonexempt property to the trustee, who will sell it to pay the petitioner’s creditors. However, very few people actually lose property in a Chapter 7 bankruptcy. A petitioner that originally filed a Chapter 13 bankruptcy might not want to convert to Chapter 7 if that petitioner has substantial equity in his or her house, motor vehicles, stamp or coin collections, substantial investments, expensive jewelry or family heirlooms because these items are subject to the Chapter 7 exemption limits. Therefore, conversion of a Chapter 13 to a Chapter 7 may result in a loss of property.

One benefit to sticking with a Chapter 13 is the impact on the petitioner’s credit report. Although both types of bankruptcy can be reported legally by credit bureaus for 10 years from the date of filing, the major credit bureaus have voluntarily agreed to remove Chapter 13 bankruptcies after seven years from the date of filing.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.