Trouble With Chapter 13 Payments? About Conversion to Chapter 7

Have you chosen Chapter 13 bankruptcy with a repayment plan? While these plans work out for many debtors, a lot can change in the three to five years of the plan's lifetime. If your situation has or is about to change for the worse, what happens if you can no longer fulfil your repayment schedule? Here's what you need to know. 

You Can Change to Chapter 7

The good news is that if you can't carry on with Chapter 13, you do have bankruptcy recourse. You may apply to have your case converted to Chapter 7, which is liquidation and discharge. The same case will continue, but you'll receive a new trustee and have to amend a number of documents filed for your case. These amended documents usually include Schedule I and Schedule J as well as the Statement of Intent. 

As with any Chapter 7 bankruptcy, the trustee would then liquidate nonexempt property and use it to pay off remaining creditors to the extent possible. Generally, this only includes property you owned when the conversion was done. 

You May Need to Qualify Again

To convert your case, you may or may not be required to qualify for Chapter 7. Qualification usually means that you would submit to the means test. The means test has two parts, first comparing your income over the past six months with a standard threshold and then subtracting a list of allowed expenses and checking again.

If you lost a job or income within that six month period, the court can look at extenuating circumstances in the means test. If you still don't qualify for Chapter 7 even in your new circumstances, you can often request permission to convert your case anyway. 

You Can't Act in Bad Faith

The court will carefully assess the reason you are converting your case. You must not appear to be misusing the bankruptcy system with this move. Transparency and honesty about your changing circumstances, assets, and debts is essential.

If the court believes you have deliberately withheld information, provided false information, transferred assets to facilitate the conversion, or otherwise acted dishonestly, it can deny the petition or revalue your bankruptcy estate to include both assets owned when you first filed for Chapter 13 and assets you gained later. 

You May or May Not Save Assets

What happens to your major assets that you kept by opting for Chapter 13? The answers depend on the situation. As with any Chapter 7 bankruptcy, you can exempt certain assets from liquidation in accord with state or federal rules. 

You may also be able to reaffirm loans for things like your primary home and vehicles. Reaffirming loans does require that you meet certain rules, such as that you are current with payments. With your new circumstances, though, you may need to carefully reconsider reaffirming loans that have since become burdensome. The choices you made when first applying for bankruptcy may not still be the right ones. 

You Should Consult With an Attorney

If you think that you may need to convert your repayment case to a liquidation, the time to start making a plan is before things get dire. For instance, if you want to reaffirm any loans, missing payments could make that impossible. Acting early can protect you.

Meet with an experienced bankruptcy attorney in your state to find out what the rules are and what options may work for you. Georgia residents can count on the legal team at  Custer, Custer & Clark LLC to help them navigate this process. Call today to make an appointment and find out how to ensure the best outcome no matter what's changed in your life.