The question of course is why would anyone need to convert his Chapter 7 case to Chapter 13 when the former is a total wipeout of debt, while the latter would require partial or full payment of debt?
It’s because after you file your Chapter 7 case, the estimated value of your house was wrong, the value was higher than what you thought, or a lot of your debt is actually non-dischargeable perhaps unpaid income taxes are less than three years old, or you forgot that you had another house somewhere with significant equity. Let’s focus on the first situation.
You thought that your house only had equity of $600,000, i.e. fair market value less outstanding mortgage and other secured liens. It turns out that your house equity is actually $650,000. At the 341-a meeting, the Chapter 7 trustee says he’s going to list your house for sale because he thinks your house’s current fair market value is $675,000. Well there you go, you have a big problem. Nowadays with house values going up every day, this can really sneak up on you.
You only owe $30,000 of credit card debt but the Chapter 7 trustee wants to sell your house, give you $600,000 then use the rest to pay himself his retirement account, and pay the $30,000 off in full. Yep, that can really happen. You dug a deep hole for yourself and you need to quickly get out of that hole.
So what is the solution to this crisis? There’s Section 706 of the bankruptcy code that allows you to convert your Chapter 7 case to Chapter 13. What does this do? If you can actually succeed in converting your Chapter 7 case to Chapter 13, then your house will be beyond the reach of the Chapter 7 trustee, he will be taken off your case, and a Chapter 13 trustee will take over your case. Note that the Chapter 13 trustee, unlike the Chapter 7 trustee, has no power to sell your home. What she can do with the non-exempt equity of your house is use that to get more money out of you in your Chapter 13 plan.
For instance, she can ask that you fully pay your $30,000 of credit cards over 60 months in the plan because your non-exempt equity in your home is between $50,000 and $70,000. But she cannot sell your home. So this is like a pinprick compared to a sledgehammer hitting you in Chapter 7.
Section 706 of the bankruptcy code allows conversion
But it’s not that simple converting from Chapter 7 to Chapter 13. Just know there is that legal possibility. Section 706 (d) of the bankruptcy code still says that, “Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.”
What this means in plain English is that since you want to convert to Chapter 13, you have to prove that you are eligible for Chapter 13. What does this mean? It means you must prove that you have the ability to make plan payments in Chapter 13. To have the ability to make plan payments, you must have disposable income. Therefore, you have to examine all your possible income that could be relied on to make your plan payments.
Another requirement is that you must have no bad faith or abuse of process in your case. In re Marrama, a U.S. Supreme court case decided in 2007 comes into play. In Marrama, he wanted to convert his Chapter 7 case to Chapter 13. The bankruptcy court denied his motion to convert. Marrama then appealed to the Supreme court arguing that under 706(a), he had an absolute right to convert.
The problem is that Marrama was a sneaky guy. He misrepresented the value of his house in Maine, and he did not disclose that he had already transferred his house a year before. So the court said that although debtors have the right to convert from 7 to 13, that right is not absolute and is subject to the court’s discretion to allow or not. The court said that Mr. Marrama was deliberately in bad faith because of what he did therefore the court denies his motion to convert to chapter 13.
The Marrama case
Another requirement for conversion and reconversion (Chapter 13, then Chapter 7, then back to Chapter 13) is that the totality of circumstances must show good faith (this basically affirms Marrama), and must show that his proposed Chapter 13 plan is feasible. What does feasible mean? It means that you have enough disposable income the make the plan payments required in your proposed Chapter 13 case. In this example, the debtor has to pay $30,000 over five years. Therefore, he must be able to show clear and convincing evidence that he has enough disposable income to pay at least $500 a month for his Chapter 13 to be feasible.
The Povah case
Not all courts believe they have the discretion to act on a reconversion. This means the case was filed first as Chapter 13, then, converted to Chapter 7, and now the debtor wants to reconvert to Chapter 13. There is a split of bankruptcy courts on this issue. In re Povah, a 2011 bankruptcy court case in Massachusetts, the court in its analysis said that “Based upon the decisions cited above, this Court adopts the reasoning of courts such as Bange and Anderson and concludes that it has discretion to permit reconversion of the Debtor’s case to a case under Chapter 13 in appropriate circumstances. The debtor’s circumstances, however, must be closely scrutinized, see Anderson 341 B.R. at 769, and the debtor also must establish both good faith and the feasibility of any plan of reorganization.”
So if you factually are in good faith and have the other requisites to prove that you can have a feasible Chapter 13 plan, you have a legal pathway to save your house from the Chapter 7 trustee.
Here’s the most important thing you have to do, kneel down, be humble, and sincerely ask God for his help to get your case back on Chapter 13.
In chapter 6 of the Bible, the prophet Daniel was sentenced by King Darius to die in a den of lions. If you are in Chapter 7 and the trustee has now listed your house for sale, you are now in the den of lions. These lions are the Chapter 7 trustee, his realtors, and his lawyers. Every action to take will cost you big bucks. Let’s not even get into how much those big bucks can get. You won’t even be able to imagine the figures involved. To sell your house to get $30,000 to pay your credit cards, it will take $100,000, that’s how absurd it can get. Of course, that will all come out of your house sale proceeds, it’s coming out of your skin.
So Daniel is now in the lions’ den getting ready to be eaten. But lo and behold, our God sends an angel into the lion’s den and closes their mouths!
“Daniel, servant of the living God, has your God, whom you serve continually, been able to rescue you from the lions?” asks King Darius.
“May the king live forever! My God sent his angel, and he shut the mouths of the lions. They have not hurt me, because I was found innocent in his sight. Nor have I ever done any wrong before you, your majesty.”
“I issue a decree that in every part of my kingdom people must fear and reverence the God of Daniel. For he is the living God and he endures forever; his kingdom will not be destroyed, his dominion will never end. He rescues and he saves; he performs signs and wonders in the heavens and on the earth. He has rescued Daniel from the power of the lions.”
Look at the incorruptible body of the blessed Carlo Acutis who died at 15 in 2007. You can look at his body in Rome, Italy, now 14 years after his death. He looks like he’s just asleep in his jogging suit and rubber shoes! That is a perfect example of an ongoing sign on earth that the God of Daniel, our God, my God, is almighty and all powerful that He even suspends the natural laws of biology and physics without any effort. He resurrected His one and only beloved son from death on the cross. He has power over death.
If you need debt relief, set an appointment to see me. I will analyze your case personally.
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DISCLAIMER: NONE OF THE FOREGOING IS CONSIDERED LEGAL ADVICE. EACH CASE IS DIFFERENT.
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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 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.
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