Posted On February 20, 2019
Should You Convert Your Bankruptcy Case?

Should You Convert Your Bankruptcy Case?

An unexpected life event could make it difficult to meet Chapter 13 repayment obligations. Converting to a Chapter 7 bankruptcy could decrease financial strain and allow the debtor to discharge all or most of his or her unsecured debt. Conversion might not be the solution for everyone. A bankruptcy lawyer can help in determining whether the pros outweigh the cons of pursing a conversion.

Valid Reasons for Converting to Chapter 7

During a three to five-year repayment plan, a lot can change. There are valid reasons why one might choose to convert their Chapter 13 bankruptcy to Chapter 7:

  • A major life event, such as the death of a spouse, the birth of a child, divorce, serious illness or job loss prevents the debtor from maintaining his or her plan payments.
  • The debtor originally filed for Chapter 13 to protect his or her home from foreclosure but now wants to surrender the home.
  • The reason behind filing Chapter 13 was to protect assets such as cars and jewelry and the debtor is now ready to surrender these items and qualify for Chapter 7.
  • The court has ordered the debtor to convert to Chapter 7 because he or she has fallen behind with Chapter 13 payments and is unable to catch up.

Considering the Pros vs. the Cons on Conversion

Converting to a Chapter 7 bankruptcy can allow the debtor to possibly eliminate most of his or her unsecured debt without having to continue making payments. He or she will be relieved of the financial strain of making the payments set by his or her Chapter 13 repayment plan. The debtor may also be able to have any funds that are in possession of the Chapter 13 Trustee refunded if the funds have not yet been distributed to creditors before the bankruptcy is converted.

However, debtors must also be aware of the potential downsides to converting from Chapter 13 to Chapter 7. A Chapter 7 bankruptcy will only eliminate unsecured debt like medical bills, credits cards, and payday loans. The debtor will still be responsible for his or her secured debt, including mortgages and car payments. Priority debts, including taxes owed to the IRS and child support, might not be cleared either. The debtor could face the possibility of home foreclosure, repossession of vehicles and other seizure of assets to pay Chapter 7 creditors.