By Kitty J. Lin
There could be many reasons why you may convert your Chapter 13 bankruptcy case to a Chapter 7 bankruptcy case. Maybe you had a significant decrease in income and can no longer afford to remain in a Chapter 13 bankruptcy case. Maybe the car you were trying to save in your Chapter 13 plan has been totaled in an accident or is no longer running. Maybe it does not make financial sense to try to keep your house any longer. Whatever the reasons are you can no longer proceed with your Chapter 13 case and need to convert to a Chapter 7 so that you can still receive a discharge of your debts. What happens to your assets in this in-between period from when your Chapter 13 bankruptcy case was confirmed to when your case is converted to a Chapter 7 bankruptcy case and why should you care?
All assets that you own at the time your Chapter 13 bankruptcy case is filed are part of the bankruptcy estate. If you need to convert your case from a Chapter 13 to a Chapter 7, the assets in the bankruptcy estate would consist of everything you still have left from when you initially filed your Chapter 13 bankruptcy case. See 11 U.S.C. §348. This means that at the time of conversion you would have less assets than when you first filed your Chapter 13 bankruptcy case because some of the assets have depreciated in value (cars have more wear and tear as the years pass) or are no longer in working condition. All new assets that you purchased after your Chapter 13 bankruptcy case was filed would not be part of the bankruptcy estate. One caveat is that if your bankruptcy case was converted due to bad faith, then the bankruptcy estate would consist of all assets you own at the time the case was converted. The reason you should consult a bankruptcy lawyer about these rules is because it may affect whether or not your assets could be liquidated when you convert Chapter 7.
One example is if you were involved in a car accident and your car was totaled. The settlement you receive for your personal bodily injuries would not be part of the bankruptcy estate if there is no bad faith alleged. If the proceeds are not part of the bankruptcy estate then you do not have to worry about the proceeds being liquidated by the Chapter 7 trustee to pay off your creditors. If there was bad faith then the settlement proceeds could be part of the bankruptcy estate at the time of conversion and would need to be protected using your exemptions, if there is any left. If you cannot exempt the settlement proceeds, then the settlement proceeds could pay a percentage of the claims of your creditors depending on the unprotected proceeds you receive and how much debt you have.
One thing is clear: if you think you need to convert your Chapter 13 bankruptcy case to a Chapter 7 bankruptcy case and you have purchased, acquired, or received new assets after your Chapter 13 case was filed, you should consult with a bankruptcy attorney to ensure your assets are protected in the conversion.