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Court Converts Bankruptcy Case from Chapter 13 to Chapter 7 Based on Finding that Debtor Withheld Information

kakisky from morguefile.comA federal district court affirmed a bankruptcy judge’s order converting a Chapter 13 bankruptcy to a Chapter 7 based on a finding of bad faith on the part of the debtor. In re Killian, No. 3:12-cv-03156, order (C.D. Ill., Sep. 30, 2013). Federal bankruptcy law allows a court to dismiss a case, or to convert it to a different chapter, for cause. The bankruptcy court found that the debtor failed to disclose, among other transactions, a transfer of cash that occurred just days before he filed his Chapter 13 petition, and held that he filed the petition in bad faith. It ordered a conversion to Chapter 7 to protect the creditors’ interests.

A debtor may wish to convert their case from one chapter to another for a near-infinite number of reasons, but this option is only available automatically once. The law specifically prohibits conversion of a case that has already been converted unless specifically set for hearing. 11 U.S.C. §§ 706(a), 1307(b). In a Chapter 13 case, the court can dismiss the case or convert it to a different chapter if a party in interest or the trustee makes a motion and shows cause. “Cause” may include material failures by the debtor to comply with court orders or the Chapter 13 bankruptcy plan, 11 U.S.C. § 1307(c), but may also involve a showing of the debtor’s bad faith. Marrama v. Citizens Bank of Massachusetts, 127 S. Ct. 1105, 1113-14 (2007).

A conversion by the court in such a case should serve “the best interest of the creditors.” Killian, order at 11. Most personal bankruptcies are filed under either Chapter 7 or Chapter 13. Each offers distinct advantages depending on an individual debtor’s circumstances. From a debtor’s perspective, a Chapter 13 case could safeguard certain assets that a trustee might sell in a Chapter 7 case. Creditors, however, might want to convert a Chapter 13 case to a Chapter 7 if the debtor has not made a full disclosure of all assets. A creditor could then ask the court to find that a previously-undisclosed asset is non-exempt.

The debtor in Killian filed a Chapter 13 petition in March 2011, but did not disclose a sale of real property within two years of the filing date. An evidentiary hearing revealed that he had sold the land for $60,000 in April 2009, with the proceeds held in trust. Two days before he filed his petition, his wife received $11,000 from the trust, and about $2,500 remained in the trust on the filing date. The bankruptcy court held that the debtor’s failure to disclose these assets and transfers was intentional and fraudulent, and potentially barred exemption of the asset. It converted the case to Chapter 7 for the creditors’ protection, and the district court affirmed the decision after the debtor’s appeal.

If a person’s debt is too great for them to pay from their available income, a bankruptcy filing may bring them some relief. A debtor can restructure bill payments to something more manageable, liquidate assets to pay debts, and possibly even discharge certain debts entirely. Bankruptcy attorney Devin Sawdayi has over sixteen years’ experience guiding clients through Chapter 7 and Chapter 13 bankruptcies in the Los Angeles area. Contact us today online or at (310) 475-9399 for a free and confidential consultation to see how we can help you.

More Blog Posts:

Quitclaim Deed Deemed a Fraudulent Transfer by California District Court, Los Angeles Bankruptcy Lawyer Blawg, November 26, 2013

How Are Payday Loans and Cash Advances Treated in Bankruptcy? Los Angeles Bankruptcy Lawyer Blawg, October 16, 2013

Payment of a Debt Prior to Bankruptcy is Not a Fraudulent Transfer, According to Ninth Circuit, Los Angeles Bankruptcy Lawyer Blawg, June 20, 2013

Photo credit: kakisky from morguefile.com.