Life doesn’t always go according to plan. You filed Chapter 13 bankruptcy with every intention of completing your three-to-five-year repayment plan, but circumstances have changed.
The good news? You’re not locked into Chapter 13 forever. Converting to Chapter 7 is possible.
What Makes Chapter 13 and Chapter 7 Different
Chapter 13 bankruptcy is built around repayment. You propose a plan to pay back some or all of your debts over three to five years, depending on your income level. You keep your property, including your home and car, as long as you stay current on your plan payments. This chapter works well for people with a steady income who need time to catch up on mortgage arrears or car payments.
Chapter 7 takes a different approach entirely. It’s often called “liquidation bankruptcy” because a trustee can sell your non-exempt assets to pay creditors. Most people don’t lose anything because Minnesota’s exemption laws protect necessities like your home equity up to certain limits, your car, household goods, and retirement accounts. The entire process typically wraps up in three to four months, and you walk away with qualifying debts discharged.
The payment structure sets these chapters apart more than anything else. Chapter 13 requires monthly payments to a trustee who distributes funds to creditors. Chapter 7 has no payment plan. Once you file, the automatic stay stops collection efforts, and within months, your dischargeable debts disappear.
When You Might Need to Switch Bankruptcy Chapters
Job loss ranks as the most common reason people convert. You based your Chapter 13 plan on a certain income level, but now that paycheck is gone. Even with unemployment benefits, you can’t meet your monthly trustee payment. Falling behind on your plan puts you at risk of dismissal, which would leave you right back where you started, with creditors able to pursue collection again.
Medical emergencies create similar problems. You’re already stretched thin making plan payments, and then hospital bills pile up. New debt that arose after you filed Chapter 13 isn’t covered by your current bankruptcy, but it still demands payment from your already tight budget.
Sometimes the issue isn’t a crisis but a gradual realization. You thought you could manage the payment plan, but month after month, you’re barely scraping by. The stress is overwhelming, and you need a faster resolution. Chapter 7 offers that clean break.
Divorce or separation can also trigger the need for conversion. Your Chapter 13 plan was based on two incomes, but now you’re managing on one. The math simply doesn’t work anymore.
The Legal Requirements for Conversion in Minnesota
Federal bankruptcy law gives you the right to convert from Chapter 13 to Chapter 7 one time, as long as you haven’t already converted from Chapter 7 to Chapter 13 in the same case. This is your statutory right under 11 U.S.C. § 1307(a), and the court generally must allow it.
However, there’s a catch. You still need to qualify for Chapter 7 under the current bankruptcy law. You can’t use conversion as a way to dodge the means test or other eligibility requirements. The court will examine whether you meet Chapter 7 criteria at the time you request conversion, not when you originally filed Chapter 13.
Minnesota follows federal bankruptcy procedures, but local rules in the District of Minnesota may affect timing and documentation requirements. You’ll need to file a Notice of Conversion with the bankruptcy court. This isn’t just a simple form. You’re essentially starting a new phase of your bankruptcy case, and the court needs to verify you qualify.
If creditors or the trustee object to your conversion, the court will hold a hearing. They might argue you’re converting in bad faith or that you don’t meet Chapter 7 requirements. Having solid documentation of your changed circumstances becomes critical at this point.
How the Means Test Affects Your Conversion Options
The means test determines whether your income is low enough to file Chapter 7. It compares your current monthly income (calculated as an average of the past six months) to Minnesota’s median income for a household your size. If you’re below the median, you pass automatically.
If you’re above the median, the test gets more complex. It calculates your disposable income after allowing deductions for certain expenses. If you have enough disposable income to pay a meaningful amount to unsecured creditors over five years, you might not qualify for Chapter 7.
Here’s where timing matters. When you filed Chapter 13, you might have been above the median income. But if your circumstances changed and your income dropped, you might now pass the means test. The court looks at your current situation, not what it was when you first filed.
We’ve seen cases where someone filed Chapter 13 specifically because they didn’t qualify for Chapter 7 at that time. A year later, after a job loss or income reduction, they pass the means test and can convert. The law allows for these changed circumstances.
You’ll need to complete a new means test form when you request conversion. Gather your pay stubs from the past six months, tax returns, and documentation of any income sources. If you’re unemployed, you’ll need proof of that too, along with information about unemployment benefits or other assistance you’re receiving.
What Happens to Your Payment Plan When You Convert
The moment the court approves your conversion, your Chapter 13 payment plan stops. You no longer make monthly payments to the trustee. Any payments you already made stay with the trustee to be distributed according to the priority rules that were in your confirmed plan.
This creates an interesting situation. You might have paid thousands of dollars into your Chapter 13 plan over months or years. That money doesn’t come back to you. The trustee distributes it to creditors based on the plan that was in place, paying priority debts first (like certain taxes or domestic support obligations), then secured creditors, and finally unsecured creditors if anything remains.
Some people worry they’ve wasted money by paying into a Chapter 13 plan they didn’t complete. But those payments often satisfied important debts. If you were catching up on mortgage arrears, those payments kept you in your home. If you were paying off a car loan through the plan, you made progress on keeping your vehicle.
Once you convert to Chapter 7, you’re starting fresh with whatever debts remain. The Chapter 7 trustee will look at your assets to determine if anything non-exempt can be sold to pay creditors. Most people have little or no non-exempt property, so the case proceeds as a “no-asset” case.
How Conversion Affects Your Assets and Property
This is where many people get nervous. Chapter 7 is a liquidation bankruptcy, which means the trustee can sell non-exempt assets to pay creditors. But Minnesota’s exemption laws are relatively generous, and most people don’t lose property when they convert.
Your home receives protection through the homestead exemption. Minnesota allows you to exempt up to $390,000 of equity in your primary residence (this amount adjusts periodically for inflation). If you’re married and filing jointly, you can double that amount. Most people in St. Cloud and the surrounding areas have equity well below these limits.
There are other ways that you are protected, such as:
- Vehicles are protected up to $4,600 in equity per person.
- Household goods, furniture, appliances, and clothing are exempt up to $10,350 total.
- Tools of your trade get protection up to $11,000.
- Retirement accounts like 401(k)s and IRAs are fully exempt under federal law.
If you were current on your mortgage and car payments in Chapter 13, you can usually keep those assets in Chapter 7 by continuing to make payments. This is called reaffirming the debt. You sign an agreement with the lender to remain personally liable for the debt in exchange for keeping the property.
The key question is whether you acquired any significant assets while in Chapter 13. If you inherited money, received a large tax refund, or came into other property during your Chapter 13 case, the Chapter 7 trustee will want to know about it. Depending on the value and timing, these assets might not be exempt.
What Your Creditors Can Do During the Conversion Process
Creditors receive notice when you file for conversion. They have the right to object if they believe you’re converting in bad faith or don’t qualify for Chapter 7. In practice, objections are relatively rare unless there’s a specific reason for concern.
A creditor might object if they believe you have significant non-exempt assets that would be lost in Chapter 7. They might also object if they think you’re trying to discharge a debt that wouldn’t be dischargeable, like recent tax debt or a debt incurred through fraud.
The automatic stay that protected you in Chapter 13 continues in Chapter 7. Creditors still can’t call you, sue you, garnish your wages, or repossess your property without court permission. This protection remains in place throughout the conversion process and after.
However, secured creditors have options. If you’re behind on your mortgage or car payment, they can file a motion for relief from the automatic stay. This asks the court for permission to proceed with foreclosure or repossession. In Chapter 13, you had the protection of the payment plan to catch up on arrears. In Chapter 7, you need to be current or risk losing the property.
Some creditors might see conversion as an opportunity to negotiate. If you have a debt that’s partially secured (like a car loan where you owe more than the car is worth), the creditor might offer a settlement or reaffirmation agreement on favorable terms rather than risk getting nothing in the Chapter 7 discharge.
How Kain + Henehan Helps Clients Through the Conversion Process
We’ve guided many clients through the conversion process, and we know it can feel overwhelming. You’re already dealing with financial stress, and now you’re facing another legal procedure. Our job is to make this as smooth as possible.
First, we evaluate whether conversion makes sense for your situation. Sometimes it does, but sometimes there are better alternatives. We might be able to modify your Chapter 13 plan to reduce payments instead. Or we might recommend dismissing your case and filing a new Chapter 7 if that provides better protection for your assets.
If conversion is the right choice, we handle all the paperwork. We prepare and file the Notice of Conversion, complete a new means test, update your schedules and statements, and communicate with the trustee and court. You don’t need to navigate the bankruptcy court system on your own.
We prepare you for the new Meeting of Creditors. We explain what questions to expect, what documents to bring, and how to present your situation clearly. We attend the meeting with you to provide support and handle any legal issues that arise.
If creditors object to your conversion, we represent you at the hearing. We present evidence of your changed circumstances and argue why you qualify for Chapter 7 relief. We’ve successfully defended conversions even when creditors initially objected.
Throughout the process, we keep you informed. You’ll know what’s happening at each stage, what to expect next, and what you need to do. We return calls promptly and answer questions in plain language, not legal jargon.
Our goal is to get you to a discharge as quickly as possible so you can move forward with your life. We’ve seen how much relief people feel when they finally get that fresh start, and we’re committed to helping you reach that point.
Work With A Bankruptcy Attorney
You don’t have to struggle through a Chapter 13 plan that’s no longer working. If your financial situation has changed, conversion to Chapter 7 might give you the fresh start you need right now instead of years from now.
Contact Kain + Henehan by calling (612) 438-8006 or filling out the online form. We serve clients throughout St. Cloud and central Minnesota, and we’re ready to help you explore whether converting your bankruptcy case makes sense for your situation. One phone call can start you on the path to real financial recovery.