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Chapter 13 cases are occasionally converted to Chapter 7

In February, this blog discussed a provision of U.S. bankruptcy law that allows for a hardship discharge in a chapter 13 bankruptcy case. The 2005 changes to the bankruptcy code were intended to force more Americans into chapter 13 proceedings versus chapter 7. The code sets up a "means-test" that generally determines whether an individual, or married couple, qualifies for a chapter 7 bankruptcy, or whether the petition must proceed under chapter 13 of the code.

Chapter 7 is typically recognized by most Ohio residents as the more traditional form of bankruptcy. Financially distressed Ohioans seek chapter 7 relief to have unsecured debts discharged in a relatively short period of time, allowing the debtor to have a fresh start. Chapter 13 bankruptcies involve a 3-to-5-year repayment plan, in which a debtor pays all, or in most cases, a portion of the unsecured debt. At the end of the plan, outstanding unsecured debt is then discharged in the bankruptcy. In some cases, bankruptcy petitioners who qualify for chapter 7, but who are working, may choose to file under for chapter 13 for other purposes--but what if circumstances change down the road in a chapter 13?

The three main reasons people file for chapter 13 includes the means test issue created under the 2005 amendments to the bankruptcy code. However, some Cincinnati residents choose to file under chapter 13 for other reasons, including, saving the home from foreclosure, saving a car from repossession, or retaining some other valuable asset that cannot be protected under the property exemptions available under chapter 7.

Circumstances can change, however, during the 3-to-5-year chapter 13 repayment plan. An individual may go through an expensive divorce, lose their job, decide they don't need their home anymore, qualify for a loan modification and have their monthly mortgage payments reduced, or fall ill with a costly disease or condition.

When financial circumstances change during a chapter 13 plan, conversion to chapter 7 may be possible. Essentially, the court may allow a conversion for anyone in a chapter 13 plan, who otherwise qualifies for chapter 7. Others may not qualify for chapter 7, but based upon changed financial conditions, may be able to modify their payment plan to better reflect the change in circumstances.

An experienced Cincinnati bankruptcy attorney can assess an individual household financial structure and help to answer questions on what options may be available for debt relief under the bankruptcy code.

Source: Fox Business, "Convert From Ch. 13 to Ch. 7 in Bankruptcy?," Justin Harelik, Sept. 13, 2011

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