Convert Chapter 13 to Chapter 7 and Keep New Assets

29 Aug Convert Chapter 13 to Chapter 7 and Keep New Assets

Debtors having trouble making monthly payments often consider conversion of their Chapter 13 case to a Chapter 7 case. In general, a Chapter 13 case can be coverted or dismissed at the debtors’ option. However, if the plan has been in operation for several years, the debtor may have acquired new or different assets that were not owned when the case was filed. Fortunately, the law protects those newly acquired assets from the Chapter 7 trustee if the case is converted from Chapter 13 to a Chapter 7.

The Bankruptcy Code at Section 1307(a) states that “The debtor may convert a case under this chapter to a case under chapter 7 of this title at any time.” When the case is converted from a Chapter 13 to a Chapter 7, 11 USC Section 348(f)(1) provides that only the non-exempt property that was owned by the debtor when the Chapter 13 was filed and is still held by the debtor when the case is converted must be turned over to the Chapter 7 trustee.If the debtor is acting in good faith, any assets received after the Chapter 13 was filed can be kept by the debtor. Only if the case is converted to Chapter 7 in bad faith do the new assets belong to the trustee.

Bad faith is not just bad judgment or negligence, the court must find that the debtor intended to do something dishonest or fraudulent. The bankruptcy courts have seldom found bad faith in conversion from Chapter 13 to Chapter 7. To determine bad faith, a court must look closely at all of the facts and must find that there is fraud, deception, dishonesty, the failure to disclose important financial acts, or an abuse of the provisions, purpose or spirit of the Bankruptcy Code. Bad faith requires manipulation of the system in an unfair way to hurt creditors.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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