Property of Bankruptcy Estate After Conversion From Chapter 13 to Chapter 7

July 8, 2013

Converting from a Chapter 13 case to a Chapter 7 is not procedurally difficult. Most courts simply require a filed motion and a small conversion fee. A debtor may convert to Chapter 7 from Chapter 13 as a matter of right. See 11 U.S.C. §1307(a). But converting the case triggers many questions and the answers may be case-specific.

The bankruptcy court will schedule a Chapter 7 meeting of creditors and impose new deadlines. The debtor is required to file a Statement of Intention within thirty days of conversion and file amended Schedules reflecting unpaid debts incurred after filing of the petition. See Rule 1019(1)(B) and 1019(5)(B), Federal Rules of Bankruptcy Procedure. Filing new schedules is a “second-chance” opportunity for the debtor to eliminate debts that arose after the date of the bankruptcy filing, but before the date of the conversion. These debts are treated as if they arose prior to the initial petition and are subject to the bankruptcy automatic stay and to discharge. 11 U.S.C. §348(d). However, conversion of the debtor’s case does not re-impose an automatic stay when the creditor has already received relief.

Accounting for the debtor’s Chapter 7 bankruptcy estate can sometimes be difficult. The Bankruptcy Code states that the Chapter 7 estate consists of the property belonging to the Chapter 13 estate at the time of the initial bankruptcy filing that remains in the possession or control of the Debtor. 11 U.S.C. §348(f)(1)(A). However, if the court finds that the debtor converted the case in bad faith, the Chapter 7 estate property is determined upon the date of conversion. 11 U.S.C. §348(f)(2).

A recent Bankruptcy Appellate Panel case out of the 9th Circuit denied a Chapter 7 trustee’s motion to compel turnover of a tax refund. In the case of In re Salazar, 465 B.R. 875 (9th Cir BAP 2012), the debtors were owed an income tax refund when they filed their Chapter 13 bankruptcy (and admitted it was part of the Chapter 13 estate), received the refund and spent the money on ordinary and necessary expenses; and then converted the case to a Chapter 7. The BAP agreed with the lower bankruptcy court that the debtors spent the tax refund money in good faith to pay ordinary and necessary living expenses during the period from the petition date to the conversion date. Consequently, the spent tax refund was not property of the bankruptcy estate on the conversion date. See also In re Grein, 435 B.R. 695, 699 (Bankr.D.Colo.2010); Bogdanov v. Laflamme (In re Laflamme), 397 B.R. 194 (Bankr.D.N.H.2008).

 

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