Conversion of Bankruptcy: Chapter Conversion, Process and Implications

This guide explores the process of converting bankruptcy cases between different chapters, detailing the legal requirements, procedures, and implications for debtors and creditors.

Introduction

Bankruptcy is a legal process that provides relief to individuals and businesses overwhelmed by debt. The U.S. Bankruptcy Code offers various chapters under which a debtor can file for bankruptcy, each tailored to different circumstances and needs. However, situations may arise where a debtor needs to convert their bankruptcy case from one chapter to another. This guide explores the conversion of bankruptcy cases, detailing the processes, legal requirements, and implications involved.

Understanding Bankruptcy Chapters

Chapter 7: Liquidation

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," involves the sale of a debtor's non-exempt assets by a trustee. The proceeds are used to pay off creditors. This chapter is typically suited for individuals and businesses with limited income and substantial unsecured debt.

Official Link: 11 USC Chapter 7

Chapter 11: Reorganization

Chapter 11 bankruptcy, known as "reorganization bankruptcy," allows businesses and individuals with substantial debt to restructure their financial affairs while continuing operations. This chapter is complex and often used by corporations seeking to reorganize their debts and assets.

Official Link: 11 USC Chapter 11

Chapter 13: Wage Earner's Plan

Chapter 13 bankruptcy, or the "wage earner's plan," enables individuals with regular income to develop a plan to repay all or part of their debts over three to five years. This chapter is ideal for debtors who wish to keep their property and have a steady income.

Official Link: 11 USC Chapter 13

Conversion of Bankruptcy Cases

The U.S. Bankruptcy Code provides the legal framework for converting a bankruptcy case from one chapter to another. The primary statutes governing conversions include:

  • 11 USC § 706: Conversion of a Chapter 7 case to Chapter 11, 12, or 13.
  • 11 USC § 1112: Conversion or dismissal of a Chapter 11 case.
  • 11 USC § 1307: Conversion of a Chapter 13 case to Chapter 7, 11, or 12.

Official Link: 11 USC § 1112

Voluntary Conversion

From Chapter 7 to Chapter 13

Debtors may voluntarily convert their Chapter 7 case to Chapter 13 if they meet the eligibility criteria for Chapter 13. This conversion allows debtors to retain their assets and repay their debts over time.

Process:

  1. Filing a Motion: The debtor files a motion to convert the case with the bankruptcy court.
  2. Court Approval: The court reviews the motion and, if approved, converts the case to Chapter 13.
  3. New Plan Submission: The debtor submits a repayment plan for court approval.

Official Link: Dismiss or Convert a Bankruptcy Case

From Chapter 13 to Chapter 7

Debtors may convert their Chapter 13 case to Chapter 7 if they can no longer meet the repayment plan requirements. This conversion is often sought when the debtor's financial situation worsens.

Process:

  1. Filing a Motion: The debtor files a motion to convert the case with the bankruptcy court.
  2. Court Approval: The court reviews the motion and, if approved, converts the case to Chapter 7.
  3. Asset Liquidation: A trustee is appointed to liquidate the debtor's non-exempt assets.

Official Link: Dismissal, Conversion & Closing of a Bankruptcy Case

Involuntary Conversion

From Chapter 11 to Chapter 7

Creditors or the U.S. Trustee may seek to convert a Chapter 11 case to Chapter 7 if the debtor fails to comply with the reorganization plan or engages in fraudulent activities.

Process:

  1. Filing a Motion: Creditors or the U.S. Trustee file a motion to convert the case.
  2. Court Hearing: The court holds a hearing to consider the motion.
  3. Court Decision: If the court finds cause, it converts the case to Chapter 7.

Official Link: 11 USC App Rule 1019

Conversion Procedures

Filing Requirements

When converting a bankruptcy case, specific documents and forms must be filed with the bankruptcy court. These typically include:

  • Motion to Convert: A formal request to convert the case.
  • Amended Schedules: Updated financial statements reflecting the debtor's current situation.
  • Conversion Fee: Payment of any applicable fees for the conversion process.

Court Approval

The bankruptcy court must approve the conversion. The court evaluates the debtor's eligibility and the reasons for conversion. If the court finds the conversion appropriate, it issues an order converting the case.

Implications of Conversion

Impact on Debtors

Asset Retention

Converting from Chapter 7 to Chapter 13 allows debtors to retain their assets and repay their debts over time. Conversely, converting from Chapter 13 to Chapter 7 may result in the liquidation of non-exempt assets.

Repayment Plans

In Chapter 13, debtors must adhere to a court-approved repayment plan. Conversion to Chapter 7 eliminates the repayment plan but may involve asset liquidation.

Impact on Creditors

Payment Distribution

Conversion affects how creditors are paid. In Chapter 13, creditors receive payments according to the repayment plan. In Chapter 7, creditors are paid from the proceeds of asset liquidation.

Priority of Claims

The priority of claims may change upon conversion. Secured creditors generally have priority over unsecured creditors in Chapter 7, while Chapter 13 provides a structured repayment plan for all creditors.

Discharge of Debts

The discharge of debts varies by chapter. Chapter 7 provides a quicker discharge, while Chapter 13 requires completion of the repayment plan. Conversion may delay the discharge process.

Tax Implications

Conversion can have significant tax implications. Debtors should consult with tax professionals to understand the potential tax consequences of converting their bankruptcy case.

Official Link: Publication 908, Bankruptcy Tax Guide

Conclusion

The conversion of bankruptcy cases is a complex process governed by specific legal statutes and procedures. Understanding the requirements and implications of conversion is crucial for debtors and creditors alike. This guide provides a comprehensive overview of the conversion process, helping individuals navigate the intricacies of bankruptcy law.

For more detailed information, refer to the official resources provided throughout this guide.

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Von Wooding

Von Wooding

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