Finishing a three- to five-year Chapter 13 case isn't easy, especially if your income drops and you can't afford the monthly payment. If you're struggling with your Chapter 13 payment, you'll want to learn about your options. Find out how to:
Once you've learned about converting your Chapter 13 case to Chapter 7 bankruptcy, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy. Also, consider learning how often you can file a bankruptcy case and the problems you might face when filing more than once within a year.
Yes, converting Chapter 13 to a Chapter 7 is something debtors need to do on occasion. But you might not qualify, or it might not be the best move for you. Here are a few pros and cons to consider before converting your Chapter 13 case.
The most significant benefit of switching to Chapter 7 bankruptcy? You'll finish your bankruptcy sooner and might pay less toward bills. But that's pretty much it. More "cons" are associated with converting to Chapter 7 for a good reason. Chapter 7 likely wasn't a good fit when you initially filed for Chapter 7, and it probably still isn't.
Think back to why you decided to file for Chapter 13. The same bankruptcy problems you hoped to avoid by filing for Chapter 13 could still be in play. Check the cons list below to see if any issues sound familiar.
You might lose property. Did you file for Chapter 13 because you wanted to keep property you'd lose in Chapter 7? If so, the property might still be at risk. Because the Chapter 7 trustee will sell assets not covered by a bankruptcy exemption, if you filed Chapter 13 to protect home equity, for instance, you might lose the house after the conversion.
You might not be able to wipe out your debt in Chapter 7. Chapter 13 lets you erase more debts than Chapter 7. So if you were using Chapter 13 to eliminate the property division debt owed to your ex-spouse, a tax debt charged on a credit card, or some other debt you can erase in Chapter 13 but not Chapter 7, you'll be out of luck.
Creditors might start hounding you. Many people use Chapter 13 to force creditors into a payment plan. It gives the filer time to pay "nondischargeable debts" that don't go away in bankruptcy, like recent taxes and support obligations, without worrying about wage garnishments, bank levies, creditor lawsuits, and the like. The potential problem here? You might face collection actions again, including foreclosures and repossessions, because nondischargeable debt balances you haven't fully paid through Chapter 13 will come due after you receive your Chapter 7 debt discharge.
You might not qualify. Your income must be low enough to pass the Chapter 7 means test to convert to Chapter 7, although not all courts agree that this is the case. Your bankruptcy attorney can explain the requirements in your area. In the meantime, you'll want to learn more about taking the means test.
It might be too soon for a Chapter 7 discharge. Sometimes people file for Chapter 13 because they filed for bankruptcy previously, and it was too soon to receive another Chapter 7 debt discharge. The waiting period for a Chapter 7 discharge is six years if you previously filed for Chapter 13 and eight years for Chapter 7. If you filed for bankruptcy before and the required waiting period hasn't elapsed, it won't do much good to convert your case. You still won't be eligible for a Chapter 7 discharge.
If converting your Chapter 13 bankruptcy to Chapter 7 isn't a good fit, you have options.
Catch up informally. The trustee might give you a couple of months to bring your account current, but don't expect more. And you'll likely need to pay extra for late fees incurred on a mortgage or another loan.
Modify your payment. The court can lower the amount paid to nonpriority unsecured creditors, such as credit card balances, medical bills, and personal loans, but not much else. Learn more about modification in Chapter 13 and calculating your Chapter 13 payment.
Consider a Chapter 13 hardship discharge. The difficulty posed by a Chapter 13 hardship discharge is that you must pay a certain amount to creditors before the judge can eliminate qualified debt. Most filers won't qualify unless they exempted most of their property when they filed initially or are close to plan completion.
If a conversion is right for you, you'll start by filing a motion with the court. You'll also likely need to complete new bankruptcy forms, including a Statement of Intention for Individuals Filing Under Chapter 7 form—you'll find a link below. A local bankruptcy attorney can advise you about the process and notify creditors as required.
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.