- Personal bankruptcy includes either Chapter 7 or Chapter 13.
- If you file Chapter 7, but do not qualify you can typically convert the petition to Chapter 13.
- You could also choose to convert the petition if you want to retain property or have debts that are only dischargeable in Chapter 13.
- Chapter 13 bankruptcy requires you to repay a portion of the debt owed before receiving a discharge.
When you decide to file personal bankruptcy, you must choose how you file. In most cases, you will choose either Chapter 7 or Chapter 13.
Chapter 7, also called liquidation bankruptcy does not require you to repay creditors prior to a discharge. However, you must liquidate or sell non-exempt assets and the trustee will use the proceeds for creditor repayment. After completing the process, the judge will discharge qualified debt balances. The process generally takes no more than six months to complete.
Chapter 13, on the other hand requires you to repay unsecured debtors for up to five years before you can receive a discharge of qualified debts. Due to the extended repayment, it is often possible to retain more property even if you are delinquent on loans securing the assets when you file the petition.
Qualifying for Chapter 7
Because Chapter 7 circumvents repayment, it is often the preferred choice for borrowers who do not have non-exempt assets. However, to qualify for Chapter 7 you must pass a means test. If you earn above the median income in your state based on your household size, you may find you are unable to meet the requirements for Chapter 7.
Court Required Conversion: If you file Chapter 7, and the trustee determines you do not qualify, a judge will dismiss your case. You typically have the option to convert the petition to a Chapter 13. Doing so will require you to get a repayment plan approved by the courts. Chapter 13 also requires you to make payments on unsecured debts forfive years before a judge discharges any debts.
Voluntary Conversion: You might also decide to convert to Chapter 13, even if you qualify for Chapter 7. The most common reasons include having an increase in income, owning assets you want to protect, or the existence of debts dischargeable in Chapter 13 but not in Chapter 7.
The bankruptcy courts allow you to keep certain assets, described as exempt assets. Any property above and beyond those exemptions are subject to sale by the trustee to repay creditors. Owning a home or car with lots of equity could put those assets at risk.
Converting to Chapter 13 often allows you to keep the property. When you qualify for Chapter 7, but choose to file Chapter 13 to preserve assets, the repayment plan is three years instead of 5.
In both cases, you must pay 100% of disposable income to creditors and follow all the rules laid out by the trustee including taking education courses, getting a repayment plan approved, and making payments on the plan each month. Failing to meet any bankruptcy requirement could lead to a dismissal of your case.
How to Convert a Chapter 7 to a Chapter 13
The process of converting from Chapter 7 to Chapter 13 is mostly procedural. The first step is to file a motion requesting permission to convert the petition. The court will send the notice to creditors listed on the petition, the trustee, the US Trustee, and other interested parties. You must then attend a hearing. In most cases, if no one objects the court will grant your request.
You must follow the rules in the district where you filed the petition, which might include additional steps.
A judge may not approve the request if you don’t qualify for Chapter 13, you acted in bad faith, or you have a prior conversion on the same petition.
