Why would you change your mind after filing bankruptcy? Can you switch “Chapters” or even get out of bankruptcy altogether?
After starting your bankruptcy case your circumstances could suddenly change. So you may no longer want to be in the bankruptcy case that you’re in.
Getting out of bankruptcy altogether—dismissing your case—is quite easy in a Chapter 13 “adjustment of debts” case. It’s harder with a Chapter 7 “straight bankruptcy” case.
Changing from one Chapter to the other—converting the case—is usually allowed either way: Chapter 7 to 13 and Chapter 13 to 7.
We start today with some reasons why you might want to dismiss or convert. Then in the next two blog posts we’ll talk about how it’s done first under Chapter 7 and then under Chapter 13.
Why This is Worth Thinking About
Reasons why this conversation is worthwhile:
• Before deciding to file a bankruptcy case it’s smart to know whether you would be able to dismiss or convert your case if something happened to change your mind.
• You’ll better informed and thus likely be more careful when you file a bankruptcy case if you think in advance about situations which might induce you to want to get out of it.
• If your circumstances do change after your case is filed, you’ll understand your options better.
Why Dismiss or Convert?
What kinds of situations would lead to a person to want to get out of a bankruptcy case after filing one?
The situations tend to be different under Chapter 7 vs. Chapter 13. These differences reflect two very practical differences in these two legal options: their length and their likelihood of successful completion:
• most Chapter 7 cases last no more than about 4 months, compared to three to five years for a successful Chapter 13 case; and
• most Chapter 7 cases are completed successfully (at least those where the debtors are represented by an attorney), while a significant portion of Chapter 13 cases are not.
Situations for Dismissing or Converting Under Chapter 7
Under Chapter 7 there’s simply less that can go wrong and a lot less time for your circumstances to change.
The focus is on your assets and debts at the fixed moment in time when your case is filed. So if a careful analysis of your financial situation at that time shows that your case qualifies for Chapter 7, not much should change that.
Here are some unusual situations that can nevertheless arise making you wish you could get out of your Chapter 7 case (and sometimes instead convert to a Chapter 13 case):
• You were unaware at the time your case was filed that you have a legal right to a valuable asset. For example, you might not know that for estate planning purposes your parents’ had earlier secretly deeded their vacation home to you and your siblings.
• Assets are largely fixed as of the date of filing, but under Section 541(a)(5) of the Bankruptcy Code if somebody dies within 180 days of the filing of your case leaving you as the beneficiary of an inheritance or a life insurance policy, that asset becomes legally accessible to pay your creditors.
• If right after filing your case you have an accident and incur new large medical bills, those new debts cannot be included and discharged (legally written off) in your case since that debt did not exist when your case was filed.
Situations for Dismissing or Converting Under Chapter 13
Under a Chapter 13 “adjustment of debts” bankruptcy there’s a lot going on and usually a lot more that can go wrong than in a Chapter 7 case. The focus is on your financial life not at a fixed moment in time but rather throughout the years of your case.
Your Chapter 13 payment plan specifies out how much and when the various creditors will be paid (if at all). Although often creditors don’t object to the terms of the plan they certainly can, sometimes in unexpected ways. So your proposed plan sometimes has to be changed more than you intended before it’s approved by the bankruptcy judge.
Then you have to comply with the terms of the plan, over the course of the following three to five years. This gives a lot of time for your circumstances to change. Your Chapter 13 plan usually assumes that your income and expenses will stay the same, or else sometimes tries to predict how they will change into the future. Either way, those assumptions come with risk.
Chapter 13 plans can be amended mid-stream. But sometimes the change in your circumstances is so significant that you need to get out of your Chapter 13 case (and sometimes instead convert to a Chapter 7 case). Here are some examples:
• Your plan is designed around your desire to save your home, but a year or so later you find a job that requires you to move, taking away the primary purpose of your case.
• You file a joint Chapter 13 case with your spouse, but a couple years later you get divorced, totally changing your financial life.
• Or you get married, again greatly changing your financial life.
• Your income gets significantly reduced long-term, so much so that even amending your Chapter 13 plan is not feasible, making you no longer eligible for Chapter 13.
• Or your income gets significantly increased a year into your case; so much so that you become obligated to amend your plan to pay most or all of your debt.
As mentioned above, the next two blogs will be about how to get out of Chapter 7 and then Chapter 13, in situations like these examples.