Asian Journal- The Filipino-American Community Newspaper

A BANKRUPTCY petition filed under one chapter of the bankruptcy code may be converted into a petition under a different chapter of the code. The debtor himself can request the conversion, or the court itself by its own motion or the US Trustee or the trustee administering the bankruptcy estate, or any interested party may move to have a case converted to a different chapter of the code. § 706 states that the debtor may convert a case under chapter 7 to a case under chapter 11, 12, or 13 at any time, if the case has not been previously converted under § 1112, 1208, or 1307. Debtor’s right to convert case is almost absolute if there has been no prior conversion. However, there have been cases where the court has denied debtor the right to convert where debtor has been found to be in bad faith. Hence, the right to convert is not 100% bulletproof. But a debtor who has filed his original case in good faith should not see any obstacle to converting case if he so chooses as long as no prior conversions have occurred.

Several years ago, client spouse came to see me saying that she had filed a joint chapter 7 case with her husband who was currently incarcerated. Husband was a chiropractor who was snagged by a sting operation of the district attorney’s office involving fraudulent car accident claims. Since husband was in jail, the household could no longer pay debts and debtors decided to file chapter 7. The problem was that while debtor was in jail, debtors were unaware of the fact that the market value of their residence had risen substantially, creating a significant amount of nonexempt equity when they filed their chapter 7 case.

The chapter 7 trustee smelled blood after checking out the current market value of the residence. The nonexempt equity was more than $100,000 as it turned out, so the trustee filed a motion to sell the residence.

After interviewing debtor’s wife, I found out that her husband had no idea what the fair market value of their residence was because he was still in jail and had been in jail for the last two years. She herself had no idea what the market value was when they filed their chapter 7 case. I also found out that her husband was due to be released on probation in 2 months and his mother, who owned a small manufacturing business, was willing to offer her son a position as sales manager at a $4,000 monthly salary. Thus, we filed a motion to convert their chapter 7 case into chapter 13. The chapter 7 trustee objected to conversion saying that debtors had no ability to fund a 100% chapter 13 plan because debtor was still in jail and had no income. The court set the matter for hearing and invited the parties to brief the court as to their respective positions. We were able to submit evidence showing that debtor was about to be released on parole and was in fact about to be transferred to a half way house, that his mother owned a business and that the business was ready to offer debtor a position in the business as sales manager with a gross monthly income of $4,000, making the 100% plan feasible. Debtors owed about $100,000 of credit card debt but they were willing to pay that in full over 60 months. The projected monthly net income of the household was short $1,500 monthly but debtor’s mother was willing to help out by contributing that amount to the household so that her son could start life again without losing his house to the chapter 7 trustee. The court requested further evidence, and a second hearing was set.

Finally, the court granted debtor’s motion to convert to chapter 13 under § 706. On the other hand, a chapter 13 case may be converted to a chapter 7 case under § 1307 (a). We will discuss this next week.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.

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( Published November 4, 2009 in Asian Journal Los Angeles p B7 )