Converting Your Bankruptcy: Chapter 13 to a Chapter 7? - Westgate Law

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Converting Your Bankruptcy: Chapter 13 to a Chapter 7?

Talking to a bankruptcy attorney is imperative when considering converting a Chapter 13 to a Chapter 7. There are many different issues you need to be aware of before you make this decision.

If you are in a Chapter 13 Bankruptcy there is a possibility that converting to a Chapter 7 could be beneficial. Many states have what is called “deficiency liability” which lets the mortgage holder come after the homeowner post-foreclosure for any remaining balance on the loan. Non-deficiency states are those in which you are able to walk away from a property, lose the house in foreclosure, and avoid liability on any unpaid mortgage balance. When you live in a state that has deficiency liability, a Chapter 7 bankruptcy will eliminate that liability. It is important to find out if your state has “deficiency liability” because this definitely will influence your decision.

For example, if you are not eligible for a Chapter 7 bankruptcy, perhaps you should stay in your Chapter 13 to protect yourself from mortgage deficiency liability.

In regard to car loans, the situation gets more complicated. In all bankruptcy cases, you make one payment to the Chapter 13 trustee and the trustee distributes your payments to creditors. Depending on your bankruptcy district, the vehicle balance is distributed throughout the Chapter 13 term period.  Thus, you could be current on your Chapter 13 payment, but still delinquent on your actual car payments with your creditor.

If you continue in your Chapter 13, the vehicles will be protected and paid off by the end of the bankruptcy term. The problem occurs when you convert to Chapter 7. Your lender will require you to catch up on your delinquent vehicle payments, which can amount to a substantial sum. Not all bankruptcy districts are the same, but it can be very challenging to protect your vehicles when this is the case.

When a house and vehicles are involved in a Chapter 13, there is no simple solution. If a person wants to walk away from their home, but still keep their vehicles protected, then staying in Chapter 13 could be the better option. Surrendering the property will again depend on your state’s deficiency liability policy. Again, a bankruptcy attorney’s advice can save you a lot of anguish in this situation.

Avoid unnecessary questions by getting in touch with an experienced southern California bankruptcy attorney at Westgate Law today so you can ask your questions and get an answer directly from the source.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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