Many New York residents who are struggling with debt file for Chapter 13 bankruptcy. This plan allows people to keep major assets, such as their cars and homes, while repaying creditors over a period of 3 to 5 years. In some cases however, circumstances change and a debtor may decide that it is best to convert their bankruptcy to a Chapter 7.
A Chapter 7 bankruptcy differs from a Chapter 13 in that there is no repayment plan. Instead, an individual’s assets are liquidated and creditors are compensated from those funds. At that point, most of the remaining unsecured debts are discharged. This process often takes a few months to complete. Because a Chapter 13 plan takes so much longer, it is not unusual for a debtor’s circumstances to change, making it impossible to continue with the repayment plan. At that point, the debtor may consider converting the bankruptcy to Chapter 7.
In a recent U.S. Supreme Court case, the court was presented with a situation in which a man converted his Chapter 13 bankruptcy to a Chapter 7 bankruptcy. The bankruptcy trustee had already collected some funds from his paycheck deductions which she was going to use to repay creditors. When he converted, he requested those funds back. This set off a legal battle, which was eventually settled by the Supreme Court in the debtor’s favor.
Debtors who are considering converting a Chapter 13 bankruptcy to a Chapter 7, may wish to consult with a bankruptcy attorney. The attorney may be able to advise the client as to whether a conversion is prudent, and whether the client will be able to protect assets through the conversion. In addition, if the client is entitled to a reimbursement of any funds collected under the Chapter 13 repayment plan, the attorney may be able to assist in ensuring the return of those assets.