In the last few blogs, I’ve written about the choices people who are in a chapter 13 bankruptcy case have when, for whatever reason, the chapter 13 plan payments have become difficult to afford. I wrote about simply catching up on past-due payments, or setting up a structured repayment plan, called a cure order, when the financial problem facing a chapter 13 debtor is temporary. In my last blog, I looked at plan modification, a restructuring of the chapter 13 plan, in cases where post-bankruptcy-filing financial problems are more permanent and profound.
All of those options are good for people who are navigating their way through a chapter 13 payment plan. And all of the options anticipate that the best outcome for a chapter 13 debtor is to continue in a chapter 13 case until the case ends and the chapter13 debtor receives a standard discharge. But not every case started as a chapter 13 should end as a chapter 13. In this blog, I will look at when converting a case from a chapter 7 to a chapter 13 is appropriate. The bottom line is that what almost all of our clients at Kain & Scott need, more than anything else, is a bankruptcy discharge. So when does getting that discharge through chapter 7 rather than chapter 13 make sense?
What was the reason for the chapter 13 filing?
There are a number of reasons why people file chapter 13 bankruptcy cases. But there are usually two big groups of people in chapter 13: the first group is composed of people who have significant problems with debt that is not easily resolved through chapter 7 cases. Examples are mortgage arrears, difficult-to-afford car payments, back tax problems and past-due child support or spousal maintenance payments. All of these types of debts are much more efficiently dealt with in chapter 13 than chapter 7.
Then there is the second group, composed of people whose income is above the median for a household of their size, in the state where they live. These people might have debt that is easily discharged in a chapter 7 case - such as credit cards or medical bills - but because their income is high, and the means test in the bankruptcy code doesn’t qualify them to file a chapter 7 case, their one choice for a bankruptcy case is chapter 13. The truth is, people in one or both of these groups might benefit from converting their case from chapter 13 to chapter 7, if their individual circumstances warrant.
Chapter 13 Debtors
Take the chapter 13 debtors who are in this chapter due to difficult-to-afford car payments. Now imagine a circumstance (and it’s not an uncommon circumstance) in which a mechanical problem with the car makes operating the vehicle prohibitively expensive. The car loan is being paid through the chapter 13 plan payments, but now the chapter 13 debtor no longer wishes to pay for the vehicle. The chapter 13 debtor simply wants to surrender the vehicle to the lender. If the chapter 13 debtor qualifies to do so (more about those qualifications later), one good option for the client is to “switch” the case - the legal term is convert the case - from chapter 13 to chapter 7. The reason to file the chapter 13 case was to pay for the car. But now the debtor no longer wishes to do that. So the chapter 13 debtor can surrender the vehicle to the lender, convert the case to chapter 7, ending the chapter 13 monthly payment, and then receive a bankruptcy discharge.
There are a lot of advantages to the debtor in this circumstance: chapter 7 is a much shorter process (three and a half to four months, from beginning to end) than a chapter 13 that takes a minimum of three years to complete. There are no monthly payments to a trustee in a chapter 7 case - so the debtor who now must replace a vehicle has more money available with which to afford a payment on the next car.
So a conversion from chapter 13 to chapter 7 might be a money saver for clients for whom conversion is appropriate. I’ll continue this discussion in my next blog.