Sometimes people file a Chapter 13 bankruptcy case, even though they may qualify for a Chapter 7. Why would they do that? The usual reason is that a Chapter 13 case offers people who have fallen behind in their car or mortgage payments a way to keep their property.
Ordinarily, when you fall behind in your payments, the lender has the right to “accelerate” the loan, meaning that the only way to keep your property is to pay off the entire balance of the loan. Few people who have fallen behind are in a position to do that, but that may be your only choice in a Chapter 7 case. In a Chapter 13 case, however, you can keep your home (or car) by filing a plan that allows you to make small payments against the arrearage over the course of the plan period (as long as you also resume making the regular payments).
So why would someone who filed a Chapter 13 case want to convert to Chapter 7? Often is it because after filing their Chapter 13 case, people suffer additional difficulties. They may lose a job or suffer a cutback in hours, or they may fall ill and lose time at work or they may face unexpected medical bills. When this happens, they may decide that it is futile to try to hang on to their house, and that they would be better off converting to Chapter 7.
Recently a client who had been a Chapter 13 plan for three years told me he just could not keep up with the ongoing costs of repair on his old house. In order to provide safe and sanitary housing for his family, he was forced to stop making mortgage payments, abandon the house and rent an apartment. The irony is that he could have surrendered the house and filed a Chapter 7 in the first case. Even though he has stopped making the mortgage payments, the mortgage lender had not sought the court’s permission to foreclose, because it is continuing to receive arrearage payments under the Chapter 13 plan. This man was a prime candidate for conversion of his case to Chapter 7.
If you have filed a Chapter 13 bankruptcy case and your circumstances have changed, such as a loss of employment or a serious illness, causing you to conclude that it no longer makes sense to try to hang on to your house, your bankruptcy attorney can help you decide whether it would be advisable to convert to a Chapter 7 or perhaps to ask the Court for permission to revise your Chapter 13 payment plan.