Dumping Your Chapter 7 Case Midstream, or Switching to a Chapter 13 One

You can usually change from an ongoing straight Chapter 7 case into a Chapter 13 payment plan. But getting out of bankruptcy altogether is generally not allowed.

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Once you’ve stepped into the bankruptcy world by filing a Chapter 7 “liquidation” case, it’s not easy to get out of that world voluntarily. The helpful machinery turned on by your filing can’t just be flicked off. But it is much easier to jump from Chapter 7 into Chapter 13, if you qualify for it. And sometimes Chapter 13 is where you should have been in the first place.

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Most Chapter 7 cases are finished in about 3 months. The bankruptcy trustee determines that everything you own is covered by property exemptions, so you get to keep it all—the trustee has “no assets for a meaningful distribution to the creditors.” You get your discharge of debts and your case is closed. Not much time for your circumstances to change.

But sometimes things happen. Things do in fact change. Your uncle dies unexpectedly and even more unexpectedly you get a chunk of an inheritance. Or you find out you have an asset you didn’t know about. Or something you own is worth much more than you expected. Or you run up a major medical expense right after filing. So now you don’t want to be in the Chapter 7 case, or maybe not in that Chapter 7 case. What can you do?

Commonsensically, you figure you can either end your case or switch it to some other kind of bankruptcy.

Dismissal of a Chapter 7 Case

But unlike Chapter 13, you don’t have a right to just end—“dismiss”—a Chapter 7 case.

Why not? You filed the case; why can’t you just end it?

Because the Bankruptcy Code does not give you that right. The theory is that if you submit yourself, and your assets, to the bankruptcy court in order to get the benefits you want from it—immediate protection from your creditors and a discharge (legal write-off) of all or most of your debts—then you’ve got to live with the consequences.

It’s as if you’ve created a new legal person—your “bankruptcy estate”—with the Chapter 7 trustee in charge of it. This new “person” does have a life of its own of sorts, and doesn’t disappear just because you change your mind.

That doesn’t mean you can’t ever get the court to dismiss your case. It just means that you have to have a really good reason. One that doesn’t just benefit you, but also your creditors.

This would be a touchy, really-depends-on-the-circumstances situation. Honestly, having an experienced attorney at your side would be critical for knowing what to do if this kind of thing happened to you.  That’s besides the fact that it would be much less likely to happen in the first place if you did have that attorney at your side from the beginning.

Conversion of a Chapter 7 Case

Changing your case from a Chapter 7 one before it’s done into a Chapter 13 one is much easier. The Bankruptcy Code says that the “debtor may convert a case under this chapter [7] to a case under chapter… 13… at any time, if the case has not been [already] converted… .” (Section 706(a).)

To do so, you do have to qualify for Chapter 13. Among other requirements, this means:

1) you can’t have more debt than certain limits—$360,475 in unsecured debts and $1,081,400  in secured debts (until these amounts are revised as of 4/01/13) (Section 109(e)); and

2) you must be an “individual with regular income,” meaning that your “income is sufficiently stable and regular to enable [you] to make payments under a [Chapter 13] plan.” (Sections 109(e) and 101(30).)

Whether or not you’d want to convert from Chapter 7 to Chapter 13 depends—naturally—on the circumstances. At first blush, changing from what you might have expected to be a three-month procedure into one that will likely take three years or more probably doesn’t sound so good. But if you are converting the case to preserve an asset, or to deal with a special creditor, Chapter 13 can be a very good tool for these purposes.

If either your financial circumstances significantly change after your Chapter 7 case is filed, or your case proceeds in an unexpected direction, Chapter 13 may have actually have been your better alternative at the outset. And if not, it can be a very sensible second choice.

To reiterate, a good attorney would make it much less likely that you would have things not going as planned. And if you nevertheless are in this situation because of unanticipated developments, all the more you would want an attorney to be there to help you with the delicate choices. 

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