Converting From One Bankruptcy Chapter to Another

When a debtor files for bankruptcy, he or she must choose to file under a specific chapter of the Bankruptcy Code. If the debtor simply wants to liquidate his or her assets and pay creditors from the proceeds, they would file under Chapter 7. If a consumer wants to keep their assets and obtain more time to repay creditors, they would file under either Chapter 11, 12 or 13; whereas a business seeking time to reorganize its debts would file under Chapter 11. Most individuals with steady income file Chapter 13, unless their debt exceeds a set dollar amount (click here for the Chapter 13 means test). If this is the case, the individual would file under Chapter 11 instead. Chapter 12 is reserved for bankruptcy filings by family farmers and fishermen.

Conversion

The bankruptcy term conversion refers to the process by which a debtor, creditor, or bankruptcy trustee transfers a pending bankruptcy case from one chapter to another. Conversion may occur for a number of reasons, and may be voluntary or involuntary depending on the circumstances. For example, the debtor may decide after a filing is already underway that another chapter would be more appropriate for his or her situation. Conversion may also occur if the debtor is unable to comply with a repayment plan due to a change in circumstances, such as loss of employment.

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Reasons a Conversion May Be Denied

A debtor’s right to convert their bankruptcy is absolute and cannot be waived. However, the request to convert may be denied if made in bad faith or considered an abuse of the Bankruptcy Code. For example, conversion from Ch. 13 to Ch. 7 may not be possible if a debtor’s income is too substantial as they presumably have enough money to repay their debts. If a debtor is unemployed or has very low income, they may not be able to convert their Ch. 7 case to a Ch. 13 because it is unlikely that they will be able to comply with the provisions of a repayment plan without a steady or sufficient income.

A debtor must meet the eligibility requirements for the new chapter. For example, a business cannot convert from Ch. 11 to Ch. 13, which is reserved for individuals. Likewise, an individual cannot convert from Ch. 13 to Ch. 12 if the debtor is not a family farmer or fisherman. In addition, there are debt limits under Chapters 12 and 13 and if the debtor’s obligations exceed this limit, they are ineligible to convert to these chapters.

Involuntary Conversions

An involuntary conversion occurs if a creditor or bankruptcy trustee makes a motion to the bankruptcy court to force a debtor to convert. However, the case may only be converted to a Chapter 7 or Chapter 11. There are no involuntary conversions to 12 or 13. In addition, there is no absolute right to involuntarily convert a debtor’s case. In order to succeed, a creditor or trustee must demonstrate to the court that they have good cause to request the conversion. For example, a creditor may move for conversion if a Chapter 13 debtor fails to make payments required under the established repayment plan. A trustee may move for conversion if the debtor intentionally fails to disclose significant assets. However, before an involuntary conversion can take place, the bankruptcy court must hold a hearing to give the debtor a chance to oppose the action.

If a debtor does not want to have his or her case converted to Chapter 7 whereby their assets will be liquidated to pay creditors, they can make a motion to the court to dismiss the bankruptcy action. Nevertheless, the decision whether to allow the conversion or dismiss the case is within the sole discretion of the bankruptcy court.

Case Studies: Bankruptcy Conversion Scenarios

Case Study 1: Converting From Chapter 13 to Chapter 7

John, a debtor, initially filed for Chapter 13 bankruptcy but realizes his income is insufficient to comply with the repayment plan. He considers converting to Chapter 7 to liquidate assets and repay creditors. Eligibility requirements and debt limits must be met for a successful conversion.

Case Study 2: Involuntary Conversion From Chapter 13 to Chapter 7

Sarah, a Chapter 13 debtor, fails to make required payments, leading a creditor to file for involuntary conversion. The bankruptcy court evaluates the claim and holds a hearing for Sarah to present her opposition. Involuntary conversions are limited to Chapter 7 or Chapter 11 and require good cause.

Case Study 3: Dismissing a Bankruptcy Action

Mark seeks to dismiss his bankruptcy case instead of converting it to Chapter 7. The court’s discretion determines whether to allow conversion or dismissal. Dismissing the bankruptcy action prevents asset liquidation, but Mark remains responsible for repaying creditors outside the bankruptcy process.

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