Conversion of Chapter 13 Plan

Both the initial filing of a chapter 13 petition and the debtor’s continued participation is voluntary. At any time, the debtor may elect to convert the case to chapter 7 if cause exists. A debtor may also dismiss the chapter 13 case provided that it was not previously converted from another bankruptcy chapter.

Process

Before analyzing whether cause exists to dismiss or convert to chapter 7 under, the debtor must first satisfy certain statutory prerequisites. First, if the debtor is a “farmer,” which in this context is defined as a person that received more than eighty percent of gross income from a farming operation, only the debtor can request conversion to a Chapter 7. However, “a party in interest,” as defined below< or the U.S. trustee can request dismissal of the Chapter 13 case. It is the debtor’s obligation to prove that he statutorily satisfies the definition of a “farmer.”

Next, in general a dismissal or conversion to a chapter 7, except in the case of farmers, requires that a party in interest or the U.S. trustee files such a request with the court. A party in interest includes “one who has an actual pecuniary interest in the case . . . a practical stake in the outcome of a case, . . . and who will be impacted in any significant way in the case.” Parties in interest include creditors, debtors and chapter 13 trustees.  Interestingly, there is authority that a court, in its own discretion and without a petition, can dismiss a chapter 13 case absent notice or hearing, though this is controversial.

Finally, dismissal under  requires notice and hearing. As discussed in  notice and hearing is “such notice as is appropriate in the particular circumstances and such opportunity for a hearing as is appropriate in the particular circumstances.” When appropriate, a debtor must be given the opportunity to correct plan deficiencies or argue that the plan is not deficient.

Determining if Cause Exists

To determine cause, case law enumerates eleven circumstances where cause may exist:

•  debtor’s unreasonable delay that is prejudicial to creditors;

•     Some examples are failure to appear at a creditor’s meeting, failure to provide trustworthy financial reporting, failure to comply with court orders

•  debtor’s failure to pay filing fees;
•  debtor’s failure to timely file a Chapter 13 plan;

•     The deadline for filing a plan is generally fourteen days after filing for bankruptcy; courts often extend the deadline

•  debtor’s failure to timely make plan payments;

•     Failure to pay is not grounds for automatic dismissal; a court has discretion to determine if such failure should trigger dismissal

•  a court’s denial of confirmation of a plan and denial of a request for additional time to file another plan or modify an existing plan;

•     Before dismissal, a court should allow a debtor additional time to file a plan

• a debtor’s  material default under;

•     A court should consider the totality of the circumstances in determining how to characterize a “material default”

•  a court’s revocation of an order of confirmation and denial of confirmation of a modified plan;

•     Both are required, meaning that a court revokes the order of confirmation and denies another plan

•  termination of a confirmed plan, other than for completion of payments;

•     If the plan contains a condition that non-completion of the plan triggers a termination of the plan then the court may seek to convert the plan

•  a debtor’s failure to file a list of creditors, schedules or other key documents;
•  by request of the U.S. trustee only, failure to timely file information; and
•  the debtor’s failure to pay domestic support obligations

•     While bankruptcy can be used to delay payments and restructure, there is a clear policy issue that bankruptcy cannot be used to avoid domestic obligation requirements
•     Therefore, non-payment of child support or alimony can trigger the dismissal or conversion of a pending or in-progress Chapter 13 case

Good Faith

Besides for the court-articulated eleven circumstances where cause may exist, a lack of good faith is also recognized as cause to dismiss or convert a Chapter 13 case. If a court finds that a debtor did not file the case in good faith then it can seek a conversion or dismissal of that case. While factors determining a lack of good faith vary, courts have listed fourteen possibilities used to determine good faith:

1. the amount of the debtor’s income from all sources;
2. the living expenses of the debtor and his or her dependents;
3. amount of attorney’s fees;
4. probable or expected duration of the debtor’s Chapter 13 plan;
5. motivations of the debtor and his or her sincerity in seeking relief under the provisions of Chapter 13;
6. the debtor’s degree of effort;
7. the debtor’s ability to earn and likelihood of fluctuation in his earning;
8. special circumstances such as inordinate medical expense;
9. frequency with which the debtor has sought relief under the Bankruptcy Reform Act;
10. circumstances under which the debtor contracted his debts and his demonstrated bona fides, or lack of same, in dealings with his creditors;
11. the burden which the plan administration would place on the trustee;
12. the type of debt to be discharged and whether such debt would be nondischargeable;
13. the accuracy of the plan’s statements of debts and expenses and whether any inaccuracies are an attempt to mislead the court;
14. the extent to which the claims are modified and extent of preferential treatment among classes of creditor

When viewing these factors, a court should determine whether the debtor’s filing constituted a lack of good faith.
Is debt weighing you down? Do you need a fresh start? The law office of Melanie Tavare can give you the tools you need to get that fresh start. Her experience and expertise in bankruptcy law may be right for you. Call her today for a consultation.