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Many people begin with a Chapter 13 bankruptcy but later realize they may need to convert it to Chapter 7 to relieve their financial stress and get back on track.
This process helps many individuals and families in a financial crisis. However, the decision to make this change depends on your financial situation, and it is not the right choice for everyone.
Choosing the best path for you should include weighing the pros and cons of each type of bankruptcy and working with a bankruptcy lawyer to navigate the legal process.
What Does It Mean to Convert From Chapter 13 to Chapter 7 Bankruptcy?
Chapter 13 and Chapter 7 are the two most common types of bankruptcy used by individuals and families in the United States. The key differences between the two are:
- Chapter 13 Bankruptcy: This is a structured repayment over three to five years that allows people to keep assets.
- Chapter 7 Bankruptcy: This is a quick discharge of eligible debts but may require the liquidation of some assets.
Federal statute 11 U.S.C. § 1307(a) provides a way to convert a Chapter 13 case to a Chapter 7 bankruptcy if you meet certain qualifications. This may be necessary for those who cannot meet the repayment requirements of Chapter 13 or run into other issues.
What Are the Pros of Converting to Chapter 7?
There are several benefits of using Chapter 7 bankruptcy over Chapter 13. These benefits include the following:
- Faster Debt Discharge: Chapter 7 bankruptcy eliminates unsecured debts within months. In Chapter 13, you will have a repayment plan over the next few years.
- No Monthly Payments: Chapter 7 does not include a repayment plan, so you will not have monthly payments to make. This option could be important if you do not have a steady income or have other pressing expenses.
- Protection Against Collections: Both Chapter 7 and Chapter 13 protect you from collections activities, such as harassment, foreclosure, wage garnishment, and lawsuits.
- You Can Keep Exempt Assets: In many cases, federal and state exemption laws allow you to keep your home, car, and other personal belongings.
- There Is No Risk of Dismissal: If you miss payments, the court will dismiss a Chapter 13 case. You may need to refile Chapter 13 if there is a dismissal. Since there is no repayment plan with Chapter 7, this is not a concern.
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What Are the Cons of Converting to Chapter 7?
There are also downsides to converting to Chapter 7. Sometimes, Chapter 13 better fits your individual needs and allows you to protect assets you are not willing to lose. The cons of converting to Chapter 7 include:
- Loss of Non–Exempt Assets: Chapter 7 bankruptcy calls for the liquidation of all non-exempt assets. This could include second homes, luxury vehicles, collections, or other valuable personal property.
- Not Everyone Qualifies: You must pass the Chapter 7 means test to qualify. In general, your income must be below the state median, or you must prove you cannot afford the Chapter 13 payments.
- It Affects Your Secured Debts: While you may retain some exempt assets, Chapter 7 does not allow you to catch up on missed mortgage or car loan payments. This could increase your risk of foreclosure or repossession if you have struggled to make these payments previously.
- Credit Score Impact: A Chapter 7 bankruptcy remains on your credit report longer than a Chapter 13. Chapter 7 could affect your credit score for up to a decade compared to seven years for Chapter 13.
- Limited Eligibility to File for Future Bankruptcy: Sometimes, people need to use bankruptcy to eliminate financial struggles more than once. After a Chapter 7 bankruptcy, you cannot file again until eight years after your initial filing date. You only have to wait two years to file another Chapter 13 bankruptcy.
When Should You Consider Converting Chapter 13 to Chapter 7?
Under some circumstances, converting from Chapter 13 to Chapter 7 may be of great benefit to you. While Chapter 13 reorganizes debt and helps you by negotiating debt repayment, Chapter 7 eliminates the debt entirely.
You should discuss your options with a bankruptcy attorney, but converting to Chapter 7 may be a good idea if:
- You lose your job, have a medical emergency, or there is another situation that worsens your financial situation
- Your Chapter 13 payments are unsustainable, and you may face a bankruptcy dismissal
- You no longer need to protect a secure asset, such as a home or vehicle you sold
If you are still interested in protecting key assets and you can make the payments in your repayment plan, Chapter 13 may still be a better option. Your attorney can help you understand your options based on the unique facts of your case.
Can You Improve Your Credit After Bankruptcy?
Yes, you can rebuild your credit after filing for bankruptcy. It will be difficult, but it can be done. You should:
- Make payments on time
- Stay at your current job if possible
- Apply for a new credit card
Our team can explain more options for improving your credit score when you call.
What Should I Do to Learn More?
Converting from Chapter 13 to Chapter 7 has significant benefits and risks, depending on the facts of your case. If you’re struggling with your repayment plan, talk to a bankruptcy attorney to evaluate your options. Converting to Chapter 7 bankruptcy might be just one option available to you.
Act quickly. You do not want to fall behind on payments or risk an early dismissal while you are trying to decide on the next steps.
Talk to Our NC and SC Bankruptcy Legal Team to Learn More
At Farmer & Morris Law, PLLC, we have helped more than 10,000 clients in North Carolina and South Carolina. We have six attorneys and four offices across NC and SC.
Contact us about your bankruptcy today. We will assess your options for free and discuss your next steps.
