I spoke with client this morning who is moving forward with filing a Chapter 13, but is wondering whether she can convert to a Chapter 7 filing at some time during the Chapter 13. The answer is yes. In fact, converting from a Chapter 13 to a Chapter 7 is commonly done by bankruptcy clients.
Why Not Just Start With A Chapter 7?
There are numerous reasons for choosing a Chapter 13 bankruptcy filing at the outset. The most common is that the client is facing a foreclosure and wants to save their home. A Chapter 13 filing allows you to go into a bankruptcy even if you are behind on your mortgage. This freezes the foreclosure process and creates monthly payments that allow the client to make up the deficiency over time.
Additionally, clients may have equity in a home or in other property they are not willing to turn over to the bankruptcy trustee. While it’s rare that a client has to give up property in a Chapter 7, the Chapter 13 allows clients to keep the property and make all creditors ‘whole’ over the course of the Chapter 13 payment plan.
Why Would I Convert?
Circumstances change. Sometimes, after a few months in a Chapter 13, a client reconsiders their objectives and decides they want to surrender the home. Because that was the primary reason for entering into a 13, a Chapter 7 now makes sense. As a result, the client converts, and the Chapter 7 is concluded in a much shorter time period. This allows the client to begin rebuilding credit more quickly. It also means there’s not a monthly Chapter 13 payment obligation to keep up with.
Another reason for converting might be that the client’s income increases some time during the repayment period and they are able to make up the deficiency on the mortgage. At that time, if they submit the remaining deficiency they are typically eligible for a Chapter 7. The client keeps their home, the monthly payment obligation goes away, and they focus on rebuilding their savings and their credit.
What Do I Lose When I Convert?
You don’t lose anything when you convert. You’ll receive credit for any attorney’s fees you’ve paid, and you’ll receive credit for any deficiency on a mortgage that you’ve paid. You should speak with your attorney about the conversion and whether it makes sense for you, but in all, the ability to convert is representative of the flexibility extended to us under bankruptcy law.
If you’d like to speak with me about your options, please call 704.749.7747 today. I’m happy to have a free phone consultation to help you move forward. Getting educated about your choices feels good and it’s the smart thing to do.