Converting bankruptcy cases requires proof of new financial circumstances
Debtors who have filed bankruptcy under Chapter 13 start with the court's approval of their plan to pay back creditors over three to five years. If they are unable to continue those payments during the process, all is not lost. The U.S. Bankruptcy Court provides some flexibility for debtors who may not be able to finish a Chapter 13 case, and they can be granted financial relief nonetheless.
The alternative to finishing the repayment plan is to convert the court case to Chapter 7, a liquidation process that is more direct and can be finished within a few months. While this form of bankruptcy calls for the debtor to sell assets to pay creditors, major possessions such as a house, car and personal belongings are frequently covered by state and federal exemptions.
As long as the debtor has not converted a previous bankruptcy and is eligible for a Chapter 7 filing, a conversion can take place at any time for any reason. "This is an absolute right, and there are no restrictions," writes Maryland bankruptcy attorney Brett Weiss on Bankruptcy Law Network.
Perhaps most important for a debtor whose finances took a downward turn mid-way through the Chapter 13 case is converting to Chapter 7, as this option eliminates all unsecured debts such as credit card and medical bills. When Chapter 13 debtors are likely to lose their homes or cars because they haven't been able to catch up on back payments, converting to a liquidation bankruptcy makes sense because they will no longer be liable for any loss that occurs when the property is sold by the lender.
A conversion from one type of bankruptcy to another requires that a motion be filed with the court, along with updated financial records, recent tax returns and proof of unemployment if the debtor has lost his or her job. In some cases, a debtor may be able to receive a refund for some of the payments made under the Chapter 13 repayment plan if the trustee hasn't forwarded them to creditors.
This individual would then follow all the requirements of a Chapter 7 case, and would have the ability to add debts incurred since the Chapter 13 petition was filed.
A conversion from a liquidation proceeding to a Chapter 13 case is also allowed if financial circumstances improve in the course of a bankruptcy. Once the court confirms a repayment plan, debtors can begin monthly installments and keep their property.
Sign up for a free bankruptcy attorney consultation to have all your questions answered.