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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Converting Chapter 13 bankruptcy to Chapter 7
Bankruptcy Adviser

Husband's job loss could open new chapter

Dear Bankruptcy Adviser,
My husband and I wanted to file a Chapter 7 bankruptcy. We were told we made too much money to file a Chapter 7 and were forced to file a Chapter 13. In the process of filing, we surrendered our home. We filed successfully but it was later dismissed due to failure to send in payments. My husband lost his job -- that's why we were not able to pay. What rights do we have now, concerning our finances? Our attorney never advised us of what our rights or options were. We feel we were improperly advised by the lawyers handling our case.
-- Tammy

Dear Tammy,
At this point, I believe you have some options. First, I'm assuming that with the loss of your husband's job, your household income has dropped significantly. This means you might qualify for a Chapter 7 bankruptcy, which could eliminate your debt.

Sometimes, it can be a good idea to dismiss a Chapter 13 and file a new Chapter 7.

You have already surrendered the house, so that's unlikely to be an issue in filing a Chapter 7. The question you must consider is, why was your case not converted to a Chapter 7 after your husband lost his job?

The bankruptcy code is a little unclear, but it appears likely that the reason your case was not converted is because of your income at the time of filing the Chapter 13. When you filed the Chapter 13, you and your husband earned above the median income in your state. Under a 2005 revision of the bankruptcy law, a "means test" was established that uses median income as a benchmark for deciding under which chapter of the bankruptcy code people can file. That probably was one of the reasons you did not qualify for the Chapter 7 bankruptcy. If you convert a case from a Chapter 13 to a Chapter 7, the law appears to require that you look at your income over the six-month period prior to filing the original Chapter 13. That means your Chapter 7 case would either be dismissed or require that you litigate your case.

There are special circumstances in which a judge could be swayed to consider your income at the time your case is converted. However, the result could require you to face an uncertain litigation process when you could likely file a new Chapter 7 and have a smooth case.

Now that your husband has lost his job, you should be able to file the Chapter 7 bankruptcy because obviously your household income has dropped significantly in the past few months.

Your attorney should have had an answer to this question, and that is where you need to start. If you have lost faith in your current attorney, talk with another attorney in your area.

Tammy, it's important that you act quickly. The longer you wait to complete a Chapter 7 bankruptcy, the more likely your husband will start working again. Then you might not qualify for the Chapter 7 and will be forced to file another Chapter 13. Clearly, though, you don't want your husband to turn down work simply to maintain your eligibility for a Chapter 7.

Right now, your creditors are probably starting to gear up for another assault on you and your income. Because your original debt was not discharged, it is growing again. As well, the creditors now know where you live and where you work. This will make it very easy for them to sue you and start the lawsuit process.

My advice is to get started right away. The silver lining of your husband's unemployment is your likely qualification for Chapter 7 bankruptcy. Begin that process as soon as possible. This should allow you to wipe out your debt. Then, once your husband is working again, you can use more of his income to rebuild your lives.

Bankrate.com's corrections policy-- Posted: May 15, 2007
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