subject: Is It Hard To Convert A Chapter 13 To A Chapter 7 Bankruptcy? [print this page] When you think of the term Bankruptcy, most people think of Chapter 7. A Chapter 7 bankruptcy is the most popular Chapter of personal bankruptcy. Although it's known as a liquidation bankruptcy, rarely is anyone liquidated. In today's economy, it doesn't make sense for the bankruptcy trustee to seize nonexempt property for sale, unless there is some real value there. When the bankruptcy code was changed back in 2005, Congress felt more Americans were capable of paying back at least a portion of their debts. To achieve this they created a means test where the debtor filing bankruptcy needed to qualify to file Chapter 7. Basically, the test was to take the debtor's average income and compare it against the median income chart for their state. If the individual filing bankruptcy made too much money, they would be required to file Chapter 13 bankruptcy instead.
When we fast forward to the financial meltdown in 2008, many Americans all of a sudden see a benefit in Chapter 13 bankruptcy. With a Chapter 13 bankruptcy the individual and their bankruptcy attorney are required to come up with a feasible repayment plan that will last 3 to 5 years. The repayment plan is paid to the bankruptcy trustee who will disperse the cash to creditors based on priority. Since it's repaid on priority, the secured creditors get paid first and any unsecured creditors will get whatever's left over. This allows the individual filing bankruptcy to keep all their property if they choose to. Sometimes an individual has gotten behind on their mortgage payments and the house is now in foreclosure. Since the Chapter 13 bankruptcy shares the power of the automatic stay, just as a Chapter 7, the bankruptcy will stop foreclosure and allow the debtor to catch up on back payments. This was a perfect fit for many people due to the drop in the real estate market. Another benefit that came along was the ability to strip liens off of a house that had a second and third trust deed. In today's real estate market, many times the value of the property drop below the amount of the first trust deed, this meant that the second and third no longer were secured by the property. The bankruptcy attorney could file a motion with the bankruptcy court to strip the liens off the second and third making them unsecured debt and available for discharge.
With the current economy many people that were still employed started reaping the benefits of Chapter 13. Some that aren't so lucky might and lose their job during the Chapter 13 bankruptcy repayment plan have the ability to convert it to a Chapter 7. Flexibility is another outside in a fit of Chapter 13, the bankruptcy court understands that five years is a long time and a lot can change in one's life. If a person is in the middle of a payment plan and can no longer afford the payments, they must contact their bankruptcy attorney and amend the payment plan. The plan can be changed temporarily or permanently and if financial difficulty continues on, the bankruptcy attorney will just convert it to a Chapter 7 bankruptcy. To convert from a Chapter 13 to Chapter 7 bankruptcy, the individual will need to qualify under the means test and resubmit a new bankruptcy petition. The bankruptcy attorney and the individual will need to attend a new 341 meeting also. It is really not that big of a deal and is easily taken care of by a bankruptcy attorney.
