How to Convert Chapter 13 to Chapter 7 Bankruptcy

Some people who file for Chapter 13 bankruptcy find out that it doesn’t work for them for one reason or another. It may be that the monthly payments are hard to make or that they just want to move on and don’t want to go through years of making payments.  Or it could be that a job loss or protracted illness just simply won’t allow the required payment to be made.  Whatever the reason, if you decide that Chapter 13 bankruptcy isn’t the right fit, you may have a way out. You can convert a Chapter 13 bankruptcy to a Chapter 7 bankruptcy. However, there are a few things you should know before making the decision to do this. 

The Difference Between Chapter 7 and 13

First, it is important that you understand the difference between Chapter 7 and Chapter 13. Chapter 13 bankruptcy takes the form of a payment plan. Instead of making payments to all of your creditors, you make one monthly payment to a bankruptcy trustee. The trustee then takes this payment and disperses it to some or all of your creditors. The amount of your payment is determined by a variety of factors, including disposable income, and the payment plan takes between three and five years to complete. The main benefit of Chapter 13 is that you are able to keep your assets.   There is never a requirement to turn any items over to creditors.   

Chapter 7 bankruptcy is known as liquidation bankruptcy. Chapter 7 involves the bankruptcy trustee liquidating all of your nonexempt assets. The proceeds from this are then distributed to your creditors. Any remaining debt after this process is complete is discharged. The benefit of Chapter 7 is that it is over relatively quickly, allowing you to move on with your life.  In most cases, there are statutory exemptions that protect your assets and nothing is actually sold.  This is called a “no asset” Chapter 7. 

Can You Switch from Chapter 13 to Chapter 7?

Yes, you can switch from Chapter 13 to Chapter 7 bankruptcy under certain circumstances. This conversion is most common when a person’s financial situation changes, such as with the loss of a job or a large unexpected expense. This is not a decision that should be made lightly, as you cannot reverse it and go back to Chapter 13 without a court hearing and approval from the judge. 

Making the Switch

Making the switch from Chapter 13 to Chapter 7 is a process with a few different steps. Let’s walk through these steps and what you can expect during the conversion.  

Determine if You Qualify

First, you will need to qualify for the conversion. To do this, you must first show that you have had a significant and demonstrable decrease in income or a substantial increase in expenses, making it impossible for you to afford the Chapter 13 payments. 

File the Notice of Conversion

Next, you will need to file a notice of conversion. This is an official document informing the court of your intention to switch from Chapter 13 bankruptcy to Chapter 7. It is vital that your notice of conversion is drafted correctly. For this reason it is recommended to have an attorney help you. You will also need to pay the conversion fee when the form is submitted. In Pennsylvania, this fee is $25.  However, most lawyers charge much more than the $25 fee due to the various required schedule amendments and hearing(s).  

Provide Financial Information

You will need to provide the court with updated financial information. This includes bank statements, pay stubs, bills, and anything else showing your income or expenses. This information will be used to determine that you cannot afford your Chapter 13 payments. Make sure to include all pertinent information and that it is all accurate. Failure to do so could be seen as fraud, which could cause your bankruptcy case to be dismissed entirely. If this happens, you will lose all protections provided by bankruptcy and collection efforts against you by your creditors can begin again. 

Attend a New Meeting of Creditors

Finally, a new Chapter 7 trustee will be appointed to your case, as it is now a Chapter 7 bankruptcy. There will be a new meeting of creditors, where your trustee and creditors will go over all of your assets and discuss the disbursement of the proceeds from their possible liquidation. 

The Pros and Cons of Converting Chapter 13 to Chapter 7

Before taking the plunge and converting from Chapter 13 to Chapter 7, it is important to be aware of the pros and cons of doing so. This will allow you to make a fully informed decision.

The pros of converting include:

• Debt Discharge: Most unsecured debts, like credit card and medical bills, can be fully discharged. This will save you the money you would have had to pay over several years in Chapter 13.
• Faster Resolution: A Chapter 7 case is usually over within a few months, versus the three to five years of a Chapter 13 plan.
• Eliminates Payments: You can stop making Chapter 13 payments immediately upon conversion, which will likely give you more disposable income.
• Automatic Stay: The automatic stay protecting you from creditors is maintained after conversion. 

The cons of converting include:

• Loss of Assets: Your non-exempt assets will need to be surrendered to your trustee to be sold to pay creditors. The loss of these assets can be difficult or may impact someone other than yourself such as a family member.
• Credit Score Impact: Both Chapter 7 and 13 negatively impact your credit score, but the impact is usually much more severe in Chapter 7. 
• Credit Report: A Chapter 7 bankruptcy can stay on your credit report for up to 10 years, while Chapter 13 only remains for up to seven. 

You should consider both of these lists and determine whether or not the pros are worth the cons in your specific situation.