If the payments for a Chapter 13 bankruptcy are too difficult to make, you can convert to Chapter 7 bankruptcy.
One of the reasons the IRS re-instituted income tax source withholding around World War II was that, because of diminished transparency, it would be easier to raise taxes in the future. In other words, when taxpayers are dealing with lines on forms as opposed to real dollars from their pocketbooks, tax increases are not nearly as noticeable.
Bankruptcy forms are somewhat like tax forms, at least in this respect. A $100,000 secured debt arrearage is essentially only theoretical, until a family must make significant sacrifices each month to make the debt consolidation payments. Most of the time, such sacrifices are worthwhile. That is one reason that a Chapter 13 bankruptcy is such an effective credit re-building tool. It reinforces lessons of responsible budgeting that bode well for future financial decisions.
But what happens if the debt consolidation payments are unmanageable, either on a month-to-month basis or because of an unexpected financial storm?
Why Convert to Chapter 7 Bankruptcy?
As a brief primer, in a Chapter 7 bankruptcy, debtors agree to let the trustee (person who oversees the bankruptcy for the judge) liquidate their non-exempt assets in exchange for a nearly immediate discharge of all their unsecured debts. Most people do not have non-exempt assets, unless they have yachts and vacation homes. In so doing, debtors also agree to surrender any of their secured assets to the moneylenders that hold the notes.
In Chapter 13 bankruptcy, debtors work with their attorneys and the trustees to develop repayment plans that last either three or five years. In this way, they can catch up on secured debt arrearage and keep their secured property. At the end of the repayment period, any remaining unsecured debts (which is typically most or all of them) are discharged.
Assume Delbert Debtor files Chapter 13 bankruptcy to take care of $50,000 in mortgage arrearage. Because of his income, he has three years to repay the debt, and the $1,500 debt consolidation payment, when coupled with his other bills, is just too much. Delbert can try to modify the plan and reduce the payment, but there may not be much room to maneuver. That’s because all secured debts must be brought current during the repayment period. Delbert could also negotiate with the mortgage company to reduce the debt, but most of us can probably guess how those negotiations would turn out. It likely involves a two-letter word that begins with “n.” So, it may be the best alternative to convert to Chapter 7 bankruptcy, because the other outcome is probably a dismissal. In that case, none of Delbert’s debts will be discharged, including the mortgage arrearage.
When Can You Convert?
Per the Bankruptcy Code, most debtors have an absolute right to take a Chapter 13 repayment bankruptcy and convert to Chapter 7 bankruptcy liquidation “at any time.” That is an important provision which gives debtors a considerable amount of leverage.
In many cases, it becomes clear after a month or two that the debtor simply cannot afford the debt consolidation payment and the repayment plan is unsustainable. If modification is not an option (and remember that almost everything is negotiable in bankruptcy) it may still be better to wait until the trustee files a motion to dismiss the Chapter 13 for nonpayment. Like the timing on a bankruptcy filing, the timing of a motion to convert to Chapter 7 bankruptcy is a matter for the debtor and attorney to decide together.
Is It Better to Stay the Course With a Chapter 13?
Everyone wants a Chapter 13 to succeed. Moneylenders do not want debtors to convert to Chapter 7 bankruptcy. That’s because a Chapter 13 is nearly always their last and best hope of repayment, even though such repayment may take several months or years. For them, the alternative is a Chapter 7 liquidation, and that alternative is bleak. Although debtors technically remain liable for any unpaid amounts after secured property is sold at auction, many moneylenders do not bother filing lawsuits. Such judgments are difficult to collect in Arkansas, and the moneylender does not want to be known as the bank that kicks people when they are down.
Similarly, trustees do not want debtors to convert, because the trustee’s office loses the 10% premium it earns on each debt consolidation payment. Moreover, the trustee does not want to seize the debtor’s nonexempt assets and sell them because of the time and hassle involved.
Finally, debtors want the Chapter 13 to succeed, because they want to keep their property. Moreover, there is a moral element, because most borrowers want to repay their debts if there is any way possible to do so.
Such a large cheering section makes it a little easier to stay the course during bankruptcy and make the sacrifices needed to successfully emerge from Chapter 13. At the risk of sounding like your mother, even the leanest budgets have a considerable amount of fat:
- Dining Out: Make restaurant night an occasional treat instead of a weekly habit. Tying restaurant night to a reward, like six months of on-time debt consolidation payments, is an even better idea.
- Internet: Just kidding about this one.
- Cable: Neflix, Amazon Prime, Hulu, and so on are infinitely better (and much cheaper) than CSPAN3, the Liquidation Network, and QVC2.
An extra $20 a week can be the difference between making debt consolidation payments on time and filing a motion to convert to Chapter 7 bankruptcy.
For Questions About Whether to Convert to Chapter 7 Bankruptcy
If a Chapter 13 is truly not sustainable, taking action to convert to Chapter 7 bankruptcy is a good alternative. For a free consultation, contact Niblock & Associates and speak to a bankruptcy attorney in Little Rock. Convenient payment plans are available.