Chapter 13 Conversion Rights to Chapter 7

Greeves & Roethler, PLC

The Arizona economy continues to falter and as it does, so do people who optimistically filed chapter 13 during 2007, 2008 or 2009. Since then, the economy has worsened, foreclosures have risen and promised refinancing in the form of loan modifications have failed to materialize.  People who had jobs are now unemployed and people who were working have been injured and are now unable to work.

Based on all of this good news, our office has seen a number of Chapter 13 cases where clients are now unable to make their monthly plan payments. These cases are in danger of dismissal by the Trustees for failure to pay what is required under the plan.  Options are limited but include modification of the plan, a moratorium (which is a respite from payment requirements) or,where no payment is possible, conversion to a case under chapter 7 (a liquidation bankruptcy).

There is actually GOOD NEWS here.  The good news is that underSection 348 of the Bankruptcy Code, the property of the estate placed under the control of the chapter 7 trustee is the property as of the date of the original petition.  This means that, for example, a 2010 tax refund is NOT property of the estate for a case filed in 2007, 2008 or 2009 so the client gets to keep the money.  Similarly, if the client has managed to scrape together some savings beyond the exempt amount, the client will be able to keep them.

There is an EXCEPTION, however, under Section 348(f)(2), which states that, if a case is converted in bad faith, then the property of the estate will be the property as of the date of conversion.  Fortunately, this is a very limited exception but,under current case law, including the Mirama decision of the United States Supreme Court, it is something you should be aware of – Bad Faith.

Thank you for taking the time to read this article.  This article was written by Greeves, Price & Roethler, PLC Tempe bankruptcy lawyer Douglas B. Price, Esq.

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