Chapter 13 conversion to Chapter 7

[AliSan]

My question is somewhat complicated: As a single man, I applied for Chapter 13 relief and was confirmed. A year later, I married. My wife makes significantly more then I do. I continued on paying on my chapter 13 case, there is about 1 year left on it before it is finished. Our CPA continued to suggest we file "married filing jointly" before that we had always filed "married filing separately". My wife and I do not co mingle out finances. Our CPA wanted us to amend past tax returns to show "married filing jointly"

We called the trustee to ask if we could file "married filing jointly" the trustees office did not know and suggested we contact our initial bankruptcy attorney and ask them the question. My wife went into the bankruptcy attorney with the question regarding the tax filing question along with a copy of an un-filed "married filing jointly" return and asked them if we could start filing jointly and whether we should amend past returns. The attorney first suggest that I should turn my chapter 13 into a 7 because I had paid enough in???? something I did not know anything about. They suggested we convert to a chapter 7 and also that it was ok to file joint returns.

As a side note, my only debt on my original chapter 13 filing was 2 small credit card bills and a substantial unsecured court order to pay a third party a large sum of money.

Upon conversion, I went to a new meeting of creditors (341). They asked why I was converting, I genuinely did not know the entire process and said so, they asked if I was married I said yes, they asked how much my wife makes........and that is where everything went wrong. They filed a 707b. My question is, what is this process going forward, why did they include my wife into this situation and what are the ramifications of my conversion. I went back to the attorney that did this, I was very upset, he told me not to worry about it, that they had to file a motion to get information. I feel I need to rebut the 707b and explain the situation? Can some one offer some advice on this?

[justbroke]

Some of what you are asking is complex and contains a bunch of legal implications.

A Chapter 13 is a special form of bankruptcy in that you are in an "active" pending bankruptcy during the life of the Plan. Unless you were in a 100% plan, the bankruptcy typically requires that you commit "all disposable income" into the plan, for the benefit of the unsecured creditors, for the duration of the plan. What is really strange is why you didn't contact your attorney before or right after you were married to let them know that you have new household income. A Chapter 13 requires you, at a minimum, update your attorney when you have a significant change in circumstances such as a large bonus, windfall, or other event which would generally cause you to have an income difference of about 10% (the 10% is anecdotal based on what most people experience in a Chapter 13 and could be different in your District with your Trustee).

Additionally, if you added in your spouses income as if you were a single economic unit (as my judge likes to call it), you probably don't qualify for a Chapter 7 discharge because it would be an abuse.

Now, having wrote that, if your attorney was confident that this wouldn't be an issue, then you should ask your attorney what the game plan will be on a 707(b) Motion to Dismiss for Abuse. We have no clue as to what your attorney's theory is on this. It is true that in many cases, you could convert to a Chapter 7 after 36 months in a Chapter 13 if you either paid the base amount (which is set at confirmation) or your circumstances changes in a negative way (you had less "household" income).

It appears that your attorney already filed Objection to the Motion to Dismiss. Your attorney will rely on case law (or make new case law) with a very good reason as to why your case is not an abuse. Worse case, you could go back into the Chapter 13 (reconvert), but I don't even know what the implications will be. The implication could mean a higher payment int he Chapter 13 if you reconvert.

Speaking off the record... it's so strange that they had you do this with only 1 year left. Regardless, I think you had a duty to report the new household income to your attorney. For that reason, I can see why the Chapter 7 Panel Trustee is filing a motion for abuse because, well, you want out early even though you have had a significant increase in household income. The question will be whether your attorney is right or whether the Trustee is correct.

Would be an interesting case to watch.

[justbroke]

Is there something I'm missing, but why were you in a Chapter 13? If you had some sort of court ordered fine/restitution or some other judgment, I wonder why that wasn't treated as "non-consumer" entitling you to Chapter 7 at the start. However, I think that's not the case because you never write that your attorney suggested Chapter 7 from the start.

[AliSan]

Some of what you are asking is complex and contains a bunch of legal implications.

A Chapter 13 is a special form of bankruptcy in that you are in an "active" pending bankruptcy during the life of the Plan. Unless you were in a 100% plan, the bankruptcy typically requires that you commit "all disposable income" into the plan, for the benefit of the unsecured creditors, for the duration of the plan. What is really strange is why you didn't contact your attorney before or right after you were married to let them know that you have new household income. A Chapter 13 requires you, at a minimum, update your attorney when you have a significant change in circumstances such as a large bonus, windfall, or other event which would generally cause you to have an income difference of about 10% (the 10% is anecdotal based on what most people experience in a Chapter 13 and could be different in your District with your Trustee).

Additionally, if you added in your spouses income as if you were a single economic unit (as my judge likes to call it), you probably don't qualify for a Chapter 7 discharge because it would be an abuse.

Now, having wrote that, if your attorney was confident that this wouldn't be an issue, then you should ask your attorney what the game plan will be on a 707(b) Motion to Dismiss for Abuse. We have no clue as to what your attorney's theory is on this. It is true that in many cases, you could convert to a Chapter 7 after 36 months in a Chapter 13 if you either paid the base amount (which is set at confirmation) or your circumstances changes in a negative way (you had less "household" income).

It appears that your attorney already filed Objection to the Motion to Dismiss. Your attorney will rely on case law (or make new case law) with a very good reason as to why your case is not an abuse. Worse case, you could go back into the Chapter 13 (reconvert), but I don't even know what the implications will be. The implication could mean a higher payment int he Chapter 13 if you reconvert.

Speaking off the record... it's so strange that they had you do this with only 1 year left. Regardless, I think you had a duty to report the new household income to your attorney. For that reason, I can see why the Chapter 7 Panel Trustee is filing a motion for abuse because, well, you want out early even though you have had a significant increase in household income. The question will be whether your attorney is right or whether the Trustee is correct.

Would be an interesting case to watch.

Thank you for responding: I did tell my attorney when I got married. As a matter of fact, I called him and told him before I did and asked if it was ok. He said yes, I had already been confirmed. He never asked for income information nor did he tell me I had to inform the trustee.

This law firm, has 3 main partners. The newest partner is the one that took our office appointment regarding the tax filing question. The senior partner was the one that did the original Chapter 13. This week we went in to have a discussion with the senior partner and asked him why they suggested this conversion in the first place and he reluctantly admitted that if it were him, he would not have advised me to convert. He would have left it alone since I only had one year left.

In answer to your "paid the base amount" I had paid in the base amount that is why the newbee suggested I convert.

In answer to your question regarding the "spouse income as if you were a single economic unit.....I did not include my wife's income on my paperwork.

What do you mean when you said, "it appears that your attorney already filed Objection to the Motion to Dismiss. I am not sure my attorney has filed any objection, please explain.

[AliSan]

Is there something I'm missing, but why were you in a Chapter 13? If you had some sort of court ordered fine/restitution or some other judgment, I wonder why that wasn't treated as "non-consumer" entitling you to Chapter 7 at the start. However, I think that's not the case because you never write that your attorney suggested Chapter 7 from the start.

The attorney originally said I did not qualify for a 7. Not sure why he said this. Maybe based on my income at the time?? They also did not mention the judgement as a "non-consumer". They used secured and unsecured creditors in my case to determine who was protected and who was not. I did not have any secured creditors.

I guess my question really stems from is my now wife's income considered my income?? She has her own bank accounts, her own home which we now live in. Her home is in a trust for the benefit of her children.

My concern is that they will try to attach her financial picture with mine?

[justbroke]

Your spouses income is not your income. However, the Means Test (an arbitrary bright-line test to determine if a person should receive a Chapter 7 discharge) looks at the non-filing spouses income less that non-filing spouses "expenses". In other words, the bankruptcy code (Means Test specifically) looks at the contribution of both the non-filing spouse and any other household member that is reducing the filing debtor's total expenses.

They can't just attach her entire picture to yours. In the worse case, they can attach her income less her expenses.

I'm sorry to read that you're in this position, but hopefully your attorney (law firm) will stand by their recommendation. You may want to ask about whether you can reconvert. It is truly unfortunate that the new attorney didn't realize the history and tell you to just leave well-enough alone.

As for the "base plan" amount being paid I would say that from all my reading that is typically not an issue when converting. I believe your problem was strictly that you had a new economical unit and therefore had the ability to pay more to unsecured creditors above the base plan amount.

[AliSan]

Your spouses income is not your income. However, the Means Test (an arbitrary bright-line test to determine if a person should receive a Chapter 7 discharge) looks at the non-filing spouses income less that non-filing spouses "expenses". In other words, the bankruptcy code (Means Test specifically) looks at the contribution of both the non-filing spouse and any other household member that is reducing the filing debtor's total expenses.

They can't just attach her entire picture to yours. In the worse case, they can attach her income less her expenses.

I'm sorry to read that you're in this position, but hopefully your attorney (law firm) will stand by their recommendation. You may want to ask about whether you can reconvert. It is truly unfortunate that the new attorney didn't realize the history and tell you to just leave well-enough alone.

As for the "base plan" amount being paid I would say that from all my reading that is typically not an issue when converting. I believe your problem was strictly that you had a new economical unit and therefore had the ability to pay more to unsecured creditors above the base plan amount.

thank you for your response. I appreciate it.