Many Chapter 13 bankruptcy clients at some point during their plan payments consider changing or “converting” to a Chapter 7 for multiple reasons. Some of these reasons include a loss of income or the debtor has decided to surrender a particular piece of property. Fortunately, debtors can convert to a Chapter 7 by way of a motion. That being said, debtors need to be wary of a few issues before converting. First, a PACER check needs to be performed prior to converting to make sure no prior Chapter 7 bankruptcy cases have been filed in the previous eight (8) years. Second, if the debtors want to keep or maintain a particular piece of property, they will need to be current on the loan note after converting. This can be a little tricky sometimes if a car or other piece of collateral was being paid through the Chapter 13 plan. Just because the debtors were current with the loan note prior to filing does not mean they will be current if they convert due to the Chapter 13 plan schedule. In addition, the Chapter 13 bankruptcy plan usually pays a lower interest rate (currently 5.25%) than most car loans. If a debtor converts to a Chapter 7, the debtor will have to resume paying the original note terms.
Debtors will also want to contemplate any assets that may have unprotected equity. For example, if a debtor owns a house free and clear and its value is $75,000, the Debtor may want to stay in the Chapter 13 or look at other options other than a Chapter 7. The reason for this is that currently, the homestead exemption in South Carolina is $56,137.00. Therefore, some of the equity in this hypothetical would not be protected.