Phoenix Bankruptcy Chapter 13 to Chapter 7 Conversions

Hello folks, I hope you are all having a great Thursday. It is almost the end of the week, so there is at least one thing to be happy about today. If you are anything like me, your mind is already starting to wander towards mashed potatoes and pumpkin pie.

Let me be frank and say that this post is probably not for the bankruptcy novice. It applies to the very specific scenario of converting your previously filed chapter 13 bankruptcy to a chapter 7 bankruptcy. Now, that isn’t to say that this is a rare occurrence – in fact, it is relatively either to covert your chapter 13 bankruptcy case provided that you qualify for chapter 7. However, because a majority of my clients start out in chapter 7 bankruptcy, this article may not apply.

Regardless, here goes nothing. Let’s say that your are currently involved in a chapter 13 bankruptcy. For whatever reason, your Chapter 13 case is in trouble. The stay has been lifted on your house, or the plan payments are behind and the trustee is threatening to dismiss your case, or you’ve finally decided that the house isn’t worth the headaches you’re going through, and you just want out. What do you do?

One option is to convert your chapter 13 bankruptcy to a chapter 7. It is pretty easy, but it does require a little more paperwork – namely a Notice of Conversion – from your attorney (= additional fees for you) and a conversion fee paid to the court.

What happens next is as follows: 1. Any money that the Chapter 13 Trustee is holding, less any administrative fees that the Trustee is due, will be returned to you, 2. A chapter 7 trustee is appointed to your case, and 3. A meeting a creditors is scheduled. Oh yeah, and there may be some additional paper shuffling based on changes in circumstances, again that is more paperwork for your lawyer (=additional fees for you).

The above was just to get your familiar with the process…this is where it gets good.

• Lien Stripping and Chapter 13 to Chapter 7 Conversions:

The BAPCPA (bankruptcy Abuse and Consumer Protection Act of 2005) amended rules so that, as it currently stands, a debtor is unable to reduce secured liens to the value of the collateral (lien stripping, for those scratching their chin) in their chapter 13, before converting to a chapter 7 ( §348(f)(1)(B) for all you go-getters out there). Remember, lien stripping is a benefit of chapter 13 bankruptcy that is not available to chapter 7 debtors.

Let’s clear things up a little with an example: consider the debtor with an auto loan of $30,000 secured by a car with a Kelley Blue Book value of $15,000 (Ouch). Prior to BAPCPA, the debtor could theoretically file a chapter 13 bankruptcy to reduce the loan value, and later convert to a chapter 7. The money paid through the plan payments would further reduce the loan amount.

Then, while in chapter 7 bankruptcy, the debtor was able to redeem the car for the value of the collateral minus any plan payments made. In the above example, our debtor would save in excess of $15,000.

However, because the current rules don’t allow lien stripping to pass through chapter 13 to chapter 7 conversions, the debtor would be required to pay the full loan amount (minus payments made of the life of the plan, of course). In our fun example above, that would mean the redemption value of the car was pushing $30,000 (double-ouch).

• Post-Filing Debts and Chapter 13 to Chapter 7 Conversions:

Okay, this is where it gets fun. Normally, when you file for bankruptcy, all of your dischargeable prepetition debts will be included in the case. However, debts acquired after the date of filing are not.

When a chapter 7 in a conversion from another chapter, then debts incurred postpetition but pre-conversion become part of the debts that are paid out of the bankruptcy estate and subsequently discharged.

Consider the debtor that is filing bankruptcy because of a catastrophic, ongoing illness. If they are facing foreclosure or repossession, the may choose to file for chapter 13 bankruptcy protection to take advantage of the automatic stay. However, if circumstances change and they accumulate additional medical debt after their filing date, they may consider converting to a chapter 7 bankruptcy to include this additional debt in their case. See how nice that works out?

In addition, as part of a 1994 amendment (my life would be much easier if they just got it right the first time), in cases of good faith conversion from a chapter 13 to chapter 7, property acquired post-petition but pre-conversion are excluded from the bankruptcy estate.

Well, that’s it for today – you have been a great audience. If you have any additional questions regarding filing for chapter 13 bankruptcy in Arizona or converting your Phoenix chapter 13 bankruptcy to a chapter 7, please don’t hesitate to contact me. I am a Phoenix bankruptcy attorney with boat-loads of knowledge and experience. I offer free consultations, so come in and pick my brain.