The Debtor may convert a Chapter 13 case to Chapter 7 as of right. 11 U.S.C. §1307(a). In re DeFrantz, 454 B.R. 108 (9th Cir. BAP 2011). [That a Creditor filed a Motion to Dismiss, did not pre-exempt Debtor’s right to convert.]
- Debtor must file a Statement of Intention within thirty days of conversion and file amended Schedules reflecting unpaid debts incurred after filing of the Petition. Rule 1019(1)(B) and 1019(5)(B), Federal Rules of Bankruptcy Procedure.
- A deadline for filing Motions under 11 U.S.C. §707 and for objections to exemptions is set unless the case was previously under Chapter 7 and the deadlines for those objections had expired. Rule 1019(2), Federal Rules of Bankruptcy Procedure.
- Conversion of the case does not re-establish the automatic stay where stay relief has already been granted.
Post-Petition, Pre-Conversion Debts. Unpaid debts incurred after filing of the Petition and prior to Conversion to Chapter 7 are treated as if they arose prior to the initial petition. 11 U.S.C. §348(d). These debts become subject to the automatic stay and to discharge.
Property of the Estate. From Debtor’s perspective, there are two non-exempt property issues.
- The property of the Chapter 7 Estate consists of the property of the Chapter 13 Estate at the time of filing the petition that remains in the possession or control of the Debtor. 11 U.S.C. §348(f)(1)(A). If the Court finds that the conversion was in “bad faith,” the property of the estate also includes property of the Debtor upon the date of conversion. 11 U.S.C. §348(f)(2).In a recent BAP decision, the Chapter 7’s Motion for Turnover was denied where the Debtors had spent their non-exempt tax refunds on living expenses prior to conversion. In re Salazar, 465 B.R. 875 (9th Cir BAP 2012). See also In re Grein, 435 B.R. 695, 699 (Bankr.D.Colo.2010); Bogdanov v. Laflamme (In re Laflamme), 397 B.R. 194 (Bankr.D.N.H.2008).However, if assets are transferred out of the ordinary course, two Courts have found that the assets were subject to the administration of the Chapter 7 Trustee. Pagano v. Pergament, 2012 WL 1828854 (E.D. N.Y. 2012); Wyss v. Fobber (In re Fobber), 256 B.R. 268 (Bankr.E.D.Tenn.2000).
- Any non-exempt property is subject to liquidation by the Chapter 7 Trustee even though unsecured creditors have received monies through the Chapter 13 case.
Vehicle Debts: Valuation Issues. Any valuation of property and of secured claims made in a Chapter 13 are not binding in a converted case to Chapter 7. 11 U.S.C. §348(f)(1)(B). The Debtor does not get the benefit of a cramdown or a reduce Till interest rate. Debtor, also, loses a strip order on a second mortgage that is contingent on completion of the Plan. In re Pearson, 214 B.R. 156 (Bankr. N. D. Ohio 1997)
One of the most practical considerations in whether to convert to Chapter 7 or not is what to do with Debtors’ vehicle. During the pendency of the case, Debtors will frequently be delinquent on their vehicle payments, even with adequate protection. There is no payment on the vehicle if the Debtor has not been making plan payments.
The Debtor should immediately contact the vehicle lender on conversion to determine the availability and the advisability of a reaffirmation agreement. If the Debtor receives a large refund from the Chapter 13 payments, Debtor may consider filing a Motion for Redemption. The issue on redemption is the effective valuation date: the date of filing, or the date of the redemption hearing.
- Date for value on redemption is the date of petition: In re Morales 387 B.R. 36 (Bkrtcy.C.D.Cal., 2008)
- Date of valuation hearing: In re Cook, 415 B.R. 529 (Bankr.D.Kan. 2009); In re Wcislak, 417 B.R. 24, 28 (Bankr.N.D.Ohio Oct 01, 2009); In re Byrd, 2011 WL 2604765, (Bankr.D.Colo. 2011).
Means Test. Another issue is whether the Debtor needs to file a Means Test under Chapter 7 and, if so, for what timeframe. There is a split of authority as to whether the Means Test from the filing of the Petition still governs whether Debtor can file a Chapter 7.
- Applies: Advanced Control Solutions, Inc. v. Justice, 639 F.3d 838, 840 (8th Cir. 2011); In re Chapman,447 B.R. 250, (8th Cir.BAP 2011); In re Kellett, 379 B.R. 332 (Bankr. D. Or. 2007); In re Perfetto, 361 B.R. 27 (Bankr. D. R.I. 2007); In re Willis, 408 B.R. 803 (Bankr.W.D.Mo. 2009).
- Does not apply: In re Fox, 370 B.R. 639 (D. N.J. 2007); In re Dudley, 405 B.R. 790, (Bankr.W.D.Va. 2009); In re Miller, 381 B.R. 736 (Bankr.W.D.Ark. 2008)
Practice Pointer. It is my experience that the United States Trustee’s office will want updated Schedules I and J (Income and Expense). Within Schedules I and J is the opportunity to explain the change of circumstance that justifies the conversion to Chapter 7.