Switching Chapters During Bankruptcy

When a voluntary bankruptcy case is filed, the debtor announces his or her intent to proceed under a specific chapter of the Bankruptcy Code. There are three chapters the debtor may choose from: 7, 11, or 13. Chapter 7 is a “liquidation” bankruptcy and the debtor receives a discharge in around 4-5 months. Generally no creditors are paid during a Chapter 7 case. Chapter 11 and 13 are reorganization and repayment cases, and creditors are repaid in accordance with the debtor’s financial ability.

In some rare instances, something occurs during the debtor’s bankruptcy that changes the legal and financial landscape of the case. Suppose the debtor files a Chapter 13 bankruptcy, but then suffers a no-fault injury with medical bills and is unable to work. Consequently, the debtor no longer has the ability to pay the Chapter 13 monthly payments. When the trustee does not receive payment, the case is in danger of dismissal. What can be done?

The bankruptcy code permits a debtor to convert the case from one chapter to another. In the scenario above, the debtor could choose to convert the case to a Chapter 7 and obtain a quick discharge. As an added benefit of conversion, any debt that arose after the original bankruptcy filing date, but before the date of conversion, is included in the newly converted Chapter 7 case. This means the medical bills can be included and discharged.

Conversion works the same way from Chapter 7 to Chapter 13. For instance, suppose the debtor honestly underestimated the value of an asset. The debtor has a one-time right to convert his case from Chapter 7 to 13, as long as the case has not been previously converted. However, this right may be denied if a court finds that the conversion is due to bad faith or abuse of the bankruptcy process.

If you are struggling with your Chapter 13 payments and your circumstances have changed, discuss your situation with your bankruptcy attorney. The federal bankruptcy laws are very flexible in the hands of a skilled and experienced attorney, and are designed to get honest, but unfortunate debtors the relief they deserve.