How Courts Evaluate Whether to Convert a Chapter 7 to a Chapter 11
An individual seeking Chapter 7 bankruptcy protection must demonstrate a lack of disposable income to repay debts, but that isn’t the end of proving eligibility. The bankruptcy code allows a court to convert a Chapter 7 to a Chapter 11 under certain circumstances. This is typically done at the request of creditors who show they will benefit when a debtor is denied full discharge of debts and is required to commit to a Chapter 11 repayment plan.
In a Chapter 7 bankruptcy, known as a liquidation, the debtor is allowed to keep certain assets while other property is sold to pay off debts. In the majority of Chapter 7 cases, the total debts owed are greater than the value of the non-exempt assets. Consequently, creditors often recover little or no money. In a Chapter 11 bankruptcy, debts are restructured and only partially discharged. The debtor pays off a portion of them over a period of years under a court approved plan. Creditors can recover substantial portions of the debt over time.
A petition to convert a Chapter 7 into a Chapter 11 requires the court to balance the interests of all parties involved. The court can consider any and all factors it deems relevant, including these:
- Ability to repay — The court will likely assess the debtor’s earning capacity going forward several years. If the debtor’s projected income is too speculative, this would be a good reason for a court to reject a forced conversion.
- Possibility of reconversion — The court is unlikely to allow a Chapter 7 to 11 conversion if there is a reasonable likelihood the debtor will reconvert the case back to Chapter 7. A reconversion can happen when the debtor’s financial position is so tenuous or uncertain that he or she cannot fulfill the Chapter 11 reorganization plan.
- Likelihood of plan confirmation — A proposed Chapter 11 plan entails careful analysis of the debtor’s ability to follow the plan years into the future. A plan that is too optimistic is unlikely to be confirmed by the court. In that situation, conversion to Chapter 11 will generally not be allowed.
The decision on chapter conversion is heavily dependent on the details of each bankruptcy case. Bankruptcy judges examine the totality of the facts and circumstances to assess how conversion would benefit or harm those involved. A debtor will benefit from a skilled attorney’s assistance in fending off an attempted conversion.
Motions to convert Chapter 7 cases to Chapter 11 cases are rare. Other possible alternative when the debtor is found to have sufficient income to repay part of his or her debts are allowing the debtor to convert the Chapter 7 case to a Chapter 13 case if the debtor is under the overall $2,750,000 debt limit, or moving to dismiss the Chapter 7 case.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced and respected bankruptcy law firms. If you have a difficult or complex bankruptcy matter, feel free to contact us online or call 310-271-6223 to schedule an initial consultation.