Thinking that she is unable to pay her creditors, a consumer has filed for Chapter 7 bankruptcy. She quickly learns that in a Chapter 7 bankruptcy, a court-appointed trustee will collect and sell her "non-exempt" property, including the coin collection that she started as a child and her second car. The debtor also learns that her outstanding income tax bill will not be "discharged" or wiped out in Chapter 7 bankruptcy. In fact, she learns that Chapter 7 will not rid her of her largest debts, including those overdue student loan and child support payments. After spending some time with her finances and reviewing the various forms and documents required by the bankruptcy court, the debtor decides that she would like to try to repay her debts, even though it will require a great deal of financial restraint and self-discipline. What can she do?

How do Chapter 13 and Chapter 7 differ?

There are two basic types of bankruptcy for an individual debtor or a consumer. The law for each type comes from "Chapters" in the federal Bankruptcy Code, which is the law that debtors and bankruptcy courts must follow. First, there is a Chapter 7 "liquidation" that eliminates or discharges many debts. However, as seen from the scenario above, not all of a consumer's debts can be wiped out in bankruptcy. These debts are called "nondischargeable" debts. Second, there is a Chapter 13 "reorganization" process by which a bankrupt debtor repays some, or all, of his or her debts according to a court-approved "plan." A Chapter 13 debtor's total debt -- including secured and unsecured loans -- cannot exceed a specified amount. If the total debt exceeds the applicable amount, he or she may be able to file Chapter 11 bankruptcy.

How do I decide which is better - Chapter 13 or Chapter 7?

Like many decisions that must be made when considering bankruptcy, there is no "one size fits all" answer to this question. Each debtor needs to evaluate his or her financial situation -- both present and future. The debtor in the scenario above is learning more about the bankruptcy process as she progresses through the early stages. She decides that Chapter 13 is her best option because she wishes to keep as much property as possible. Because she cannot rid herself of her largest debts, that is, her child support and student loan payments, she knows that she has to repay them. She has few debts, other than credit card debts, that she could discharge in a Chapter 7 bankruptcy. The debtor realizes that she possibly can -- and very much wants to -- make up those mortgage payments on which she has fallen behind. After much thought, she decides to seek a "conversion" from Chapter 7 to Chapter 13.

How do I convert to a Chapter 13 bankruptcy?

Generally, a conversion from Chapter 7 to Chapter 13 is not a complicated process. The bankruptcy court will determine if the debtor is eligible to file for bankruptcy under Chapter 13. In order to qualify for Chapter 13, a debtor must have regular income and, as noted earlier, his or her total debt cannot exceed a specified amount. Because Chapter 13 requires a plan of reorganization by which the debtor will repay creditors, the debtor must have adequate income for at least reduced payments over a period of time.

For the most part, bankruptcy courts allow a conversion at any time after a Chapter 7 petition has been filed by a debtor. In order to protect creditors, certain provisions of the Bankruptcy Code were designed to prevent abuse of the conversion process. Before a Chapter 13 plan can be "confirmed" or approved, the bankruptcy court will determine if the debtor has met the "good faith" and "fair dealing" requirements of the Bankruptcy Code.

How can a Chapter 13 case be converted to Chapter 7? What about "reconversion?"

It is possible for a debtor to convert from a Chapter 13 filing to a Chapter 7 filing. In some cases that have been converted to Chapter 13, it is possible to "reconvert" back to a Chapter 7 proceeding.

Can a case be converted after a bankruptcy plan has been confirmed?

Some bankruptcy courts have ruled that debtors may indeed convert their cases from Chapter 7 to Chapter 13 after receiving a discharge. These courts have held that the language of the Bankruptcy Code seems to give an absolute right to convert "at any time" as long as the case was not previously converted to Chapter 7 from some other Chapter of the Bankruptcy Code. In contrast, some bankruptcy courts have not allowed debtors to convert to Chapter 13 after receiving a Chapter 7 discharge in bankruptcy. These courts have stated that it would be an abuse of the legal process to allow such a conversion.