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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Type of bankruptcy plan hinges on income
Bankruptcy Adviser

Converting Chapter 13 to Chapter 7
 

Dear Bankruptcy Adviser,
Back in July 2007, I filed Chapter 13 bankruptcy. I surrendered my home. Now I have an aunt who is 85 and going blind. She has offered me room and board in exchange for caring for her. Can I convert to Chapter 7 since I will no longer have any income coming in?
-- Julie

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Dear Julie,
We are now a few years removed from the 2005 bankruptcy law change. For the past couple of years, bankruptcy practitioners were unclear as to an individual's right to convert a case from Chapter 13 to Chapter 7.

Chapter 13 is known as reorganization bankruptcy, in which you make monthly payments for a three- to five-year period. Chapter 7 bankruptcy means all or most of your debts are eliminated without having to pay anything back.

The general understanding was that at the time you wanted to convert from Chapter 13 to Chapter 7, you based the analysis on your income and expenses at the time of your original Chapter 13 filing. Meaning, you could not take into account your change in circumstances to re-evaluate your current monthly income versus expenses.

At least in Southern California, this appears to have changed. Now, the trustees are looking at your current financial picture. The trustee is the person assigned to your individual case who determines whether you qualify for the bankruptcy. I cannot speak for the entire country, but California trustees have adopted this new, appropriate approach of assessing whether you qualify for Chapter 7 bankruptcy protection based on your current income and expenses.

Typically, people file Chapter 13 for two main reasons, although other reasons exist. One is that the filer wants to save a valuable asset, like a home. He or she is delinquent on the mortgage payments and needs to "reorganize" in order to catch up on those delinquent payments.

The second reason is that the filer has too much income leftover after necessary and reasonable expenses. This additional income prohibits the person from qualifying for Chapter 7 bankruptcy. Depending on his or her income, the Chapter 13 plan period will be from three to five years.

Unless you are leaving your current job to care for your aunt, you probably will have too much income to qualify for Chapter 7. You said she is offering room and board; therefore, you will not have these expenses to include in your updated list of necessary household expenses.

If you have decided to leave your current job, then you might easily qualify for Chapter 7. You will need to file a motion to convert your case from Chapter 13 to Chapter 7, along with updated schedules regarding your income versus expenses. These are Schedules I and J in the bankruptcy petition. Provide your most recent tax returns and, in the case you have left your job, proof that you are no longer employed.

If you qualify for Chapter 7 now, then you can have your case converted and eliminate most or all of the debt listed in your Chapter 13 bankruptcy petition.

Bankrate.com's corrections policy -- Posted: May 6, 2008
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