Life Happens: Bankruptcy Conversion or Dismissal During Chapter 13
Much of an individual’s bankruptcy case revolves around the date the case was filed, also called the petition date. On that date the debtor submits a financial snapshot of his income, expenses, assets and debts. Many aspects of a bankruptcy case depend upon the circumstances present on the petition date.
For most bankruptcy debtors, what happens after the date of the filing does not significantly impact the bankruptcy case. However, in some cases circumstances may necessitate a change. Sometimes it doesn’t make sense to continue with the original Chapter 13 bankruptcy case, especially when the debtor is unable to meet the financial obligations ordered in the Chapter 13 repayment plan. When this happens the debtor should discuss three options with bankruptcy counsel: (1) obtaining a hardship discharge; (2) conversion to Chapter 7; and (3) dismissal of the case.
A hardship discharge discharges the debtor before completion of the plan term, and may be available when income suddenly drops and is not expected to improve in the near future. The debtor must show that the income reduction was beyond his control and that the creditors have received as much as they would have if the case had been a Chapter 7 bankruptcy.
Conversion to Chapter 7 is often contemplated when the debtor is unable to pay for a home he was trying to save in the Chapter 13 case. In order to qualify for conversion to Chapter 7, the debtor cannot have received a Chapter 7 discharge within the last eight years, must meet certain income guidelines, and the conversion must be filed in good faith. A debtor converting from Chapter 13 to Chapter 7 may include any debts that arose between the Chapter 13 filing and the Chapter 7 conversion. Additionally, money paid to the Chapter 13 trustee, but not yet distributed to creditors, is returned to the debtor (minus the trustee’s expenses).
Finally, the debtor may consider the advantages of dismissal. Unlike a Chapter 7 case, a debtor has an absolute right to dismiss a Chapter 13 bankruptcy case. Because no discharge was entered in the case, the debtor may be eligible to re-file the case as either a Chapter 7 or Chapter, although some restrictions may apply.
If you have difficulty making your Chapter 13 payments, or find yourself with circumstances that have significantly changed, consult with your Texas bankruptcy attorney and discuss your options. The federal Bankruptcy Code is very flexible and contains options to assist you in your path to financial recovery.