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Converting a Chapter 7 to a Chapter 13
It has been a prevailing view in practice under the Bankruptcy Code that a Debtor has an absolute one-time right under Section 706(a) to convert a case from Chapter 7 to another Chapter, the most common scenario involving conversion from Chapter 7 to Chapter 13. However, two recent circuit level cases, reflecting the case law trend, have found that a motion to convert a Chapter 7 to a Chapter 13 may be denied if not made in good faith.
One scenario generally involves a Chapter 7 trustee's efforts to administer assets that are either not disclosed in the schedules but are discovered by the trustee in the performance of her duties, or which the trustee determines have a value different from that represented by the debtor. This is the situation present in In re Marrama, 430 F.3d 474 (1st Cir. 2005). The assets in question are frequently parcels of real estate or personal injury claims that debtors do not want sold or settled by the trustee. In In re Kuhn, 322 B R. 377 (Bankr. N.D. Ind. 2005), the court stated: 'Most debtors don't seek to convert to Chapter 13 from a Chapter 7 to pay their creditors. They convert to preserve property which would otherwise be lost in the Chapter 7, or to avoid the determination of ' 523(a) nondischargeable debts that is mooted by the superdischarge provision of 11 U.S.C. ' 1328(a).' 322 B R. at 393.
Debtors will attempt conversion from Chapter 7 to Chapter 13 to avoid administration of the assets by a bankruptcy trustee, since under Chapter 13, a debtor's plan needs to account for the value of any non-exempt asset, but does not require liquidation of the asset. This is consistent with the so-called 'best interests of creditors' test of Bankruptcy Code Section 1325
(a)(4) that requires creditors to receive at least as much as they would receive if the case were a Chapter 7.
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