When Is It a Good Idea To Convert To Chapter 13 Bankruptcy?
If you’re thinking about filing for bankruptcy, one of the things you’ll need to do is find out whether you qualify for Chapter 7 or Chapter 13 bankruptcy. These two types of bankruptcy both have the same goal of paying off some of your debt while helping you find financial relief and setting you up for a fresh financial start. If you can afford to pay back your debts and want to keep your property, you may want to convert your Chapter 7 bankruptcy to a Chapter 13 bankruptcy. However, they approach the situation very differently.
What Is the Difference Between Chapter 7 & Chapter 13 Bankruptcy?
Chapter 7 is the most common type of bankruptcy. Your property will be converted into a bankruptcy estate and a trustee will be given authority to liquidate your non-exempt property to pay your debts in order of priority. The remaining balance of your debts will be discharged. State and federal laws protect some of your assets from seizure. Your Hawaii bankruptcy attorney can help you protect your assets as much as possible.
Chapter 13 bankruptcy is essentially a restructuring of your debts. All of your assets are protected, and your debts are converted into a 3-5 year payment plan based on the priority of your debt and the amount of your disposable income. This type of bankruptcy is less commonly used but offers many advantages.
Why Would You Convert Your Chapter 7 Bankruptcy To Chapter 13 In Hawaii
If you initially filed for Chapter 7 bankruptcy and your financial or personal circumstances have changed, you might consider converting to Chapter 13 bankruptcy. Common reasons for wanting such a conversion include:
- A shift in financial status which makes a repayment plan feasible: If your financial situation has improved, such as landing a higher-paying job, you may find it advantageous to explore the benefits offered by Chapter 13. This bankruptcy option allows you to address overdue mortgage payments and outstanding car loan payments, providing more flexibility compared to Chapter 7.
- A newfound desire to retain an asset that might be liquidated under Chapter 7: If you discover that the value of your assets is higher than you initially believed and you’re unable to protect them from liquidation due to underestimation, you might consider switching to Chapter 13 bankruptcy. Chapter 13 allows you to retain your assets even if they can’t be exempted.
To convert your Chapter 7 to Chapter 13, consult your bankruptcy attorney. The conversion requires you to file a Notice of Conversion and possibly pay a fee. However, you must meet certain criteria to be eligible for Chapter 13.
What Happens If I Fail The Chapter 7 Means Test?
A court will require you to convert to Chapter 13 if it determines that you are not eligible to file for Chapter 7. The most common reason is due to a mistake on the Chapter 7 means test.
The means test is a challenging mathematical calculation used to determine who is eligible for a Chapter 7 discharge—the order that wipes out debt. The means test analyzes whether you can afford to make a reasonable monthly payment toward your unsecured debts through a repayment plan. You aren’t eligible for Chapter 7 if you fail the test. In most cases, your option will be to convert to Chapter 13—if you qualify. Not everyone makes enough income to pay the debts required in Chapter 13.
The court can’t force you to stay in a Chapter 13 case, however. You can ask the court to dismiss your case.
How Do I Qualify For Chapter 13 Bankruptcy?
While Chapter 7 has a means test based on income, Chapter 13 requires you to prove that you have regular income to support a repayment plan. If you initially chose Chapter 7 because you felt a repayment plan wasn’t feasible but now believe otherwise, discuss this change with your Hawaii bankruptcy law firm.
Here are some additional things to keep in mind about Chapter 13 bankruptcy:
- In a Chapter 13 bankruptcy, you will create a repayment plan that will pay off your debts over three to five years.
- You will make monthly payments to a bankruptcy trustee, who will then distribute the payments to your creditors.
- You will be able to keep your property, including your home and car, as long as you make your payments.
- Chapter 13 bankruptcy can help you get out of debt and get a fresh start financially.
If you are struggling with debt, Chapter 13 bankruptcy may be a good option for you. Speak with an experienced bankruptcy attorney to discuss your eligibility and options.
What To Expect At a Conversion Hearing
Converting your bankruptcy case from Chapter 7 to Chapter 13 is typically a straightforward process in most courts, often allowed even in the face of objections from creditors or the trustee. To make this switch, you generally need to file a formal motion with the court seeking approval, distribute this motion to all relevant parties including creditors, the trustee, and the U.S. Trustee, and attend a brief conversion-related hearing.
If there are no opposing responses to your request, certain courts may approve it without the need for a formal hearing. However, it’s important to note that many courts have specific supplementary requirements in place. Therefore, it is advisable to examine the local regulations available on your court’s official website or seek guidance from an experienced bankruptcy attorney who is well-acquainted with the procedural nuances of your particular court.
Find a Hawaii Bankruptcy Lawyer To Help You Retain Your Assets By Converting From Chapter 7 To Chapter 13
When moving to Chapter 13, the primary goal is to retain assets by repaying debts over time. As long as you adhere to the repayment plan, you can typically keep all your assets. Hawaii allows debtors to choose between federal and state exemptions. Consult Blake Goodman, P.C. on the best path for your situation.
Shifting from Chapter 7 to Chapter 13 isn’t a decision to make lightly. It can offer a more flexible route for those whose circumstances have evolved. As always, seek guidance from your bankruptcy lawyer to understand all your options. Contact us!
This article is courtesy of Zero Down Bankruptcy Lawyers of Arizona, a leading firm in Arizona that is dedicated to assisting debtors in financial freedom and a bright future.