Thinking about converting Chapter 13 to Chapter 7 before the term ends?

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Thinking about converting Chapter 13 to Chapter 7 before the term ends?

A recent court case has provided for good news for many Chapter 13 filers. There can be many scenarios wherein, Chapter 13 payment plan might just not go as planned. The filer might not be in exceptional hardship to get a ‘hardship wave off’ but certainly paying off dues as per the payment plan can become extremely challenging. Converting Chapter 13 bankruptcy to Chapter 7 is a great option for such bankruptcy filers. It was not really ‘on’ but after a recent Supreme Court hearing, it has become more realistic now. To learn more about some latest judgments and their impacts on your case, log on to

What was the case?

The historical case had Harris file for Chapter 13 bankruptcy. His approved payment plan had a $530 payment, which he provided for to the bankruptcy trustee every month. The bankruptcy trustee had to distribute those payments to two major lender categories. One chunk would go to the bank for mortgage arrears, while the second chunk would be distributed to other lenders based on the proportion of their liability. Mr. Harris was not able to keep up with the mortgage arrears and lost his home due to foreclosure. After this, Harris continued making $530 of plan payments but did not distribute the amount allocated to the mortgage arrears to other lenders.

After a year or so, the funds accumulated to $5,500 which had not been distributed to other lenders. Mr. Harris decided to convert his bankruptcy into Chapter 7 and realized within a span of 10 days, the bankruptcy trustee had distributed $5,000 to the other lenders. Mr. Harris was unhappy with this and sued the bankruptcy trustee for his $5,500.

Different courts had different opinions

Some professionals, as well as courts, thought that the funds held by the bankruptcy trustee belong on the lenders or the creditors once, Mr. Harris converted his case to a Chapter 7 bankruptcy. However, other courts and the Supreme Court judgment seem to believe that the undistributed funds in the hands of the bankruptcy trustee belong to the debtor. This was certainly a big relief for Mr. Harris and various other Chapter 13 to Chapter 7 converters.

Some key pointers in Supreme Court’s inference

Court highlighted a few points, which will be a base for many such future arguments or judgments. These can be listed as follows-

  • The court inferred that when a Chapter 13 case is converted to Chapter 7, the bankruptcy estate shall consist of income and assets owned by the filer when he/she originally filed Chapter This means any income generated after the filing debt and any asset built after the filing date, will not be included in the bankruptcy estate. All these belong to the filer.
  • The Chapter 13 bankruptcy trustee Los Angeles does not hold any right to distribute the $5,500 to the lenders as in the case of Mr. Harris.
  • In order to overcome this scenario, the bankruptcy trustee and the lenders should consider distributing income regularly and appropriately to minimize such controversial situations.

If you are a lender or a bankruptcy filer, how does this ruling affect you and your bankruptcy or lending situation? Find out by dialing in +888-297-6203.