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When to convert from Chapter 13 to Chapter 7 bankruptcy

Going through bankruptcy is not a static process as a person's life and financial situation can change in an instant. Life changes that significantly affect a person's finances are often what dictate which type of bankruptcy to file for. Some changes may even be a reason to convert a filing to a different type of bankruptcy.

Chapter 13 bankruptcy allows a person to repay some or all of their debt over a time period of three to five years. These payments are court-monitored, but flexible. Three common reasons for filing Chapter 13 bankruptcy instead of Chapter 7 are:

  • The household income exceeds limits set for Chapter 7.
  • Chapter 7 cannot protect an asset that is valuable to the debtor.
  • The debtor desires to create a plan to catch up on delinquent mortgage or car payments.

Changing to Chapter 7 bankruptcy from Chapter 13 will erase many existing debts and allow a person to begin rebuilding his or her credit. It is designed for those who cannot pay back their debts and must be approved by a judge. While a person's desire to change from Chapter 13 to Chapter 7 may be due to many circumstances, the five most common reasons are:

  • A significant drop in income, either due to job loss or pay decrease
  • High medical expenses due to illness or other unforeseen circumstances
  • A divorce or separation resulting in greater household expenses
  • A decision to let go of a home you previously made payments on
  • An approved loan modification that makes a mortgage loan current

Just because you have filed for Chapter 13 or are already in the process of repaying your debts does not mean that you cannot change to Chapter 7. Reevaluating your financial situation every six months is important, as anything can change.

Source: Fox Business, "Convert From Ch. 13 to Ch. 7 in Bankruptcy?" Justin Harelik, Sept. 13, 2011

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