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Why Would Anyone Convert Chapter 7 to Chapter 13 and Make Payments?

Everyone who files bankruptcy has the right to change their case from Chapter 7 to Chapter 13 if qualified under the general wage earner plan rules. Chapter 13 requires a regular income from employment, business or other sources. In rare cases, the trustee, court or creditors may attempt to force an involuntary conversion from one chapter to another. In most cases however, conversions are voluntary and initiated by the debtor.

Converting Chapter 7 to Chapter 13 is useful in several situations, even though the debtor must begin making at least partial payments on all debts owed. For instance, creditors may file an objection in a Chapter 7 case and seek dismal if discovering excessive income. Under the means test, reporting all income is mandatory and used in the test calculation. If income increases, or unreported, creditors may allege the debtor no longer qualified under Chapter 7 qualification restrictions. In this event, a debtor may convert from one chapter to another to avoid the objection and the potential dismissal of the case.

Weigh the Value of Tactics

The conversion tactic is also useful to pay past due debts, or debts that may become past due. If income drops from unexpected business losses or wage cuts, debtors who slip past due may roll these payments into a Chapter 13 plan.

For example, if you cannot pay your taxes, the IRS may levy accounts, seize assets, impose fines, and take even much stronger measures. The homestead exemption on a private residence is also subject to an exception that allows the IRS to seize homes for unpaid taxes. Chapter 13 laws allow debtors to roll past due taxes into a plan and prevent all of theses problems. If your income falls unexpectedly while in Chapter 7, and you anticipate tax problems, converting to a repayment plan could resolve the IRS levy issue quickly and easily.

Converting from one chapter to another is an absolute right that is not subject to waiver, so long as following the conversion rules. Used creatively, debtors may craft a strategy that gains the benefit of two chapters (and potentially three chapters) while avoiding many burdens. One of these tactics is to initially file a plan including past due payments for priority debts. Then, over a course of months or years, perhaps the debtor pays off priority debts through plan payments. Courts allow debtors to convert a Chapter 7 case to Chapter 13 as a matter of entitlement.

At this point the debtor could convert to Chapter 7 (if qualified under the means test) and discharge all remaining debts. The debtor may optionally consider using a home equity loan to pay all remaining trustee payments and accelerate discharge under the plan. In the later case, making a lump sum payment the trustee buys out the plan. This arrangement is a buyout agreement because you must obtain the trustee’s permission after loan approval. In both instances, the case resolves quickly and debtors release themselves from court supervision.

Using your rights creatively creates a wide range of profitable strategy for debtors. Yet, each case is also unique.

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