There are times when the filer of a Chapter 7 bankruptcy will want to convert that filing to a Chapter 13. However, a recent ruling in a federal district court reminded filers that their right to convert to a Chapter 13 bankruptcy is not automatic. Before any conversion can occur, the filer must meet the income requirements for that chapter.
Since a Chapter 13 is a reorganization of the filer’s debts and not a liquidation, a Florida resident must first be able to prove that he or she meets the income threshold. This is because this particular chapter requires that the filer make payments to creditors in accordance with a repayment plan that is approved by the court and lasts for three to five years. If there is no proof of steady income, the court cannot be assured that payments will be made.
The case before the U.S. District Court for the District of Delaware stemmed from a bankruptcy judge’s ruling that denied a couple the right to convert its filing from Chapter 7 to Chapter 13. Both courts determined that the couple did not have the necessary income to do so. In this case, the course also had suspicions about the filers’ motives for the conversion. The court believed that the conversion was a last ditch effort to keep the trustee from selling assets.
Florida residents need to understand that it is not their choice whether they file Chapter 7 or Chapter 13 bankruptcy. The changes in the U.S. Bankruptcy Code require potential filers to complete a means test that makes that choice for filers. Once a petition is filed, a motion to convert to another chapter could be made, but, again, there is no guarantee that motion will be granted.
Source: Bloomberg BNA, “Couple Lacking Income Can’t Convert Ch. 7 Case to Ch. 13”, Diane Davis, Feb. 9, 2016