Many people who file personal bankruptcy do so because they are behind on their mortgages or car payments. Others file simply for debt relief from significant unsecured debt such as massive credit card bills. Regardless of why you might have filed, many Debtors are forced based upon their circumstances to file a Chapter 13 case. This is not the typical liquidation where you simply walk away from your unsecured debt without paying anything, but rather, it is a form of bankruptcy where you as the Debtor reorganize your finances and pay back a portion of the unsecured debt and all of your secured and priority debt in arrears over a period of time, generally 5 years.
As a bankruptcy lawyer, I have represented many consumers in Chapter 13 cases, where their financial circumstances have changes and they are asked me if it would be possible to stop making payments and convert their case to a Chapter 7. Others have simply asked me if they can get out of the bankruptcy all together. When the later question is asked of me, I often respond by analyzing their case to determine if it might in fact be possible to convert to Chapter 7.
When a Debtor is going to look at their options and determine if they can in fact convert their case, it is often a good starting point to review three key questions: (1) Will they loose any assets in a Chapter 7 case; (2) Do they qualify under the means test to be in a Chapter 7 case; (3) Do they qualify for a reduced payment plan in Chapter 13?
First, if someone converts to a Chapter 7 case, we must determine if they are behind on any secured debt, such as mortgage or car payments. This is especially important to note if those payments were in arrears prior to filing the bankruptcy. If they were, then the Creditor may move for relief from the automatic stay once the case is converted in order to foreclose or repossess the property as a result of the Debtor having no adequate protection. The next part of this first question is whether the Debtor has an asset that may not be protected in the Chapter 7 case, based upon their liquidation analysis. If for example, you had a classic car, valued at $15,000, you may only be able to protect the first $3,450 of that car. In this scenario, the Chapter 7 Trustee would try to liquidate the car and provide the first $3,450 back to the Debtor, while retaining the surplus to pay creditors and the Trustee’s own legal fees.
The next question is whether the Debtor qualifies to be in a Chapter 7 case. Under the Federal rules, a Debtor must first have no disposable income over $166 a month in order to be in a chapter 7 case. Additionally, their gross annual income must be less then the median income for their state based upon their family size. For example, in Massachusetts, a single Debtor must make less then $54,475 a year.
The final question which in part has to do with whether any assets may be lost in a Chapter 7, is if after reviewing the Debtor’s disposable income, can they simply reduced their payment in a Chapter 13 case. In some situations the payment can be as low as $75 per month. So long as your chapter 13 payment totals more then your creditors would get in a Chapter 7 after liquidation, your disposable income will control the payment.
The questions of converting a Chapter 13 case are obviously a complex one that requires an understanding and analysis of the bankruptcy code and its procedures. As such, this is not the type of situation a pro se debtor should try to do, but it is recommended that if you are considering converting and you do not have an attorney, you should at least retain someone to review your situation before doing anything.