Can I Convert to a Chapter 7 Without Losing My House or Car?

by Heather Frances J.D. Google

When you file for Chapter 13 bankruptcy protection, the court requires you to make payments on a three to five-year repayment plan. But it's possible to convert your case to a Chapter 7 bankruptcy. Sometimes, conversion is necessary because you can’t keep up with the payments required under your Chapter 13 plan, but conversion may be possible regardless of your reason. Depending on your situation, you may keep your house and car under Chapter 7, though it may not be easy.

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Chapter 13 Vs. Chapter 7

Unlike Chapter 13, Chapter 7 requires no repayment plan. Instead, your nonexempt assets will be seized by a court-appointed bankruptcy trustee and sold, or liquidated, to pay your debts. You can convert your Chapter 13 case to a Chapter 7 case by filing a motion to convert in bankruptcy court, but you must first qualify for Chapter 7. You’ll qualify if you earn less than your state’s median income for a family of the same size as yours. If you earn more, the court requires you to pass a means test based on your disposable income, which is your total income minus allowable deductions.

Exempt Assets

Under Chapter 7, you can keep assets, including your house and car, if the asset is exempt under federal or state law. Common exemptions include homes, vehicles, personal property, household goods and appliances, but state laws vary. Some states allow you to use either the federal exemption list or your state's list of exemptions; others require you to use only your state's exemptions. Most lists contain a vehicle exemption, usually with a maximum value limit. Similarly, most lists offer an exemption for your home, up to a certain amount of equity.

Reaffirmation

If you owe money on a secured debt, like your house or your car, you can reaffirm the debt during your Chapter 7 case instead of allowing the lender to take your property. Reaffirmation means you accept the debt and promise to pay it even though it could otherwise be eliminated through your bankruptcy case. For example, if you owe $10,000 on a car loan for a car that now is worth $7,000, reaffirmation means you will pay the entire $10,000 instead of allowing the lender to take the car. You must convince both the lender and the trustee that they should allow a reaffirmation of the debt. You may need show that you are current with your payments and prove you can keep up with the future payments.

Redemption

You can also keep your car or home by redeeming it. To redeem, you pay the fair market value of the property regardless of what you owe on the loan. This can be beneficial if you owe more on your loan than the property is worth. However, you cannot use the existing loan’s terms; you must get a new loan to pay off your lender immediately. Since you are going through bankruptcy, it may be difficult to get a loan at reasonable rates.