Cite as: Keith M. Lundin, Lundin On Chapter 13, § 141.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
In language as absolute as one finds in the Code, § 1307(a) permits a Chapter 13 debtor to convert to Chapter 7 “at any time,” and “any waiver of the right to convert under this subsection is unenforceable.”1 Although there was some confusion under prior versions of the Bankruptcy Rules, it is now clear from Rule 1017(f)(3) that the debtor converts a Chapter 13 case to Chapter 7 by filing a notice of conversion.2 The Rules do not contemplate the filing of a motion or the entry of a court order; filing a notice of conversion effects conversion automatically, before notice to creditors and without court order.3 There are reported cases under prior versions of Rule 1017 indicating that conversion from Chapter 13 to Chapter 7 was by motion and conversion was measured from the filing of the motion.4
Under Bankruptcy Rule 1017(f)(3), the clerk of the bankruptcy court is required to transmit to the U.S. trustee a copy of a debtor’s notice of conversion to Chapter 7. Under Bankruptcy Rule 2002(f), the clerk, or such other person as the court may direct, is required to give notice to the debtor and all creditors of the conversion of any bankruptcy case from one chapter to another chapter. Local practice varies. In some jurisdictions, it is the responsibility of the debtor to serve notice of conversion to the Chapter 13 trustee, to the U.S. trustee and to all creditors. In some jurisdictions, the Chapter 13 trustee has been designated as the party responsible for giving notice of conversion.
The debtor is interested that all creditors get notice of voluntary conversion from Chapter 13 to Chapter 7. As discussed below,5 conversion starts new time periods for creditors to file complaints objecting to discharge and to determine the dischargeability of debts. Notice of conversion may be a prerequisite to the running of those strict time periods. In one reported decision, the U.S. Court of Appeals for the Second Circuit held that the debtor’s failure to notify a creditor of conversion from Chapter 13 to Chapter 7 was fatal to the debtor’s argument that the creditor was time barred to bring a complaint to determine the dischargeability of a fraud claim under §§ 523(a)(2) and 523(a)(3).6
The reported decisions recognize that the bankruptcy court is without discretion to withhold conversion.7 A debtor’s motion to convert (under former practice) is effective notwithstanding pending motions by others seeking dismissal of the Chapter 13 case.8 Chapter 13 is a wholly voluntary chapter. Eligible debtors are permitted to attempt a plan and, if they fail, to then convert to Chapter 7 and be liquidated. One reported decision recognizes that conversion to Chapter 7 can be refused only when the debtor is not eligible to be a debtor in a Chapter 7 case.9 One bankruptcy court denied a Chapter 13 debtor’s request for conversion to Chapter 7 based on a finding that the debtor’s “bankruptcy goal is to retain his house . . . . [O]ther than buying some additional time for the debtor to resist payment to [the mortgage holder], no purpose is served by the conversion.”10 The statutory source of this discretion is not altogether clear.11
With the enactment of 11 U.S.C. § 707(b) in 1984, it is possible for a Chapter 13 debtor to voluntarily convert to Chapter 7 but then face dismissal for “substantial abuse” of Chapter 7.12 The absolute right to convert in § 1307(a) is of little value to a debtor who cannot survive substantial abuse review after conversion. On unusual facts, a Chapter 13 debtor’s threat to convert to Chapter 7 became the debtor’s undoing in litigation to determine the extent of the Chapter 13 estate when the bankruptcy court found that any conversion to Chapter 7 would be a substantial abuse for § 707(b) purposes.13
Several § 707(b) decisions find substantial abuse based on the debtor’s potential to pay unsecured claims in a hypothetical Chapter 13 case.14 That the debtor filed but then converted a Chapter 13 case has an uncertain effect on § 707(b) analysis: failing in a Chapter 13 case might be evidence that Chapter 13 is not a reasonable alternative; filing and attempting a Chapter 13 case might be considered an acknowledgment that Chapter 13 is an alternative. The cause of the debtor’s failure in the Chapter 13 case and the reasons for conversion are relevant at the hearing on a § 707(b) challenge after conversion. For example, if the Chapter 13 plan failed at confirmation for lack of good faith,15 the debtor’s lack of good faith is likely to be considered in the substantial abuse calculus after conversion to Chapter 7.
1 11 U.S.C. § 1307(a).
2 Bankruptcy Rule 1017(f)(3), as revised in 1999, reads in part: “A . . . Chapter 13 case shall be converted without court order when the debtor files a notice of conversion under . . . 1307(a). The filing date of the notice becomes the date of the conversion order for the purposes of applying § 348(c) and Rule 1019.”
3 See In re Padalecki, 263 B.R. 785, 787 (Bankr. W.D. Tex. 2001) (Bankruptcy court construes new local rules to eliminate the need for a motion when the debtor converts a Chapter 13 case to Chapter 7. “The national rules expressly permit such conversion by notice, and the local rules cannot be contrary to the national rules. . . . The local rule does not require a motion to convert when it is the debtor seeking to convert. . . . [T]here are situations in which a motion to convert is not required—that is, when debtors voluntarily elect to convert their chapter 13 case to chapter 7. In that situation, notice is all that is required.”).
4 See, e.g., In re Boggs, 137 B.R. 408 (Bankr. W.D. Wash. 1992) (Debtor accomplishes conversion from Chapter 13 to Chapter 7 by filing a motion; conversion is effective immediately upon filing of the motion.).
6 Massa v. Addona (In re Massa), 187 F.3d 292, 297–98 (2d Cir. 1999) (Creditor’s action in state court to determine nondischargeability of claim under §§ 523(a)(2) and 523(a)(3) did not violate discharge injunction in § 524 because creditor had knowledge of Chapter 13 petition but was without notice or knowledge of conversion from Chapter 13 to Chapter 7. “Massa’s failure to notify the Addonas of the conversion from Chapter 13 to Chapter 7 is important in this case because creditors’ responsibilities are completely different under each chapter. Under Chapter 7, the issue of discharge turns upon notice/knowledge and not the scheduling of the debt; under Chapter 13, it turns on scheduling . . . . The difference is illustrated in the case of creditors such as the Addonas, who believe that the debt was induced by fraud. If they have knowledge of a Chapter 7 proceeding, they would have to act or would lose their right to collect the debt. Scheduling is irrelevant if they possessed adequate knowledge. See 11 U.S.C. § 523(a)(3). In a Chapter 13 proceeding, however, they need not act to protect their debt. . . . [W]hile the Addonas had knowledge of the Chapter 13 proceeding, they were not required to do anything to preserve their right to collect their unscheduled debt later; their inaction in the context of a Chapter 13 proceeding should not act to their detriment in the context of a Chapter 7 proceeding of which they had no notice or actual knowledge. . . . Because the Addonas had neither notice nor actual knowledge of the Chapter 7 proceeding, the debt was never discharged.”).
7 See In re Humphreys, 64 B.R. 215 (Bankr. D. Or. 1986); In re Bullock, 41 B.R. 637 (Bankr. E.D. Pa. 1984); In re McFadden, 37 B.R. 520 (Bankr. M.D. Pa. 1984); In re Langston, 40 B.R. 272 (Bankr. W.D. Mich. 1983); Perkins v. Perkins, 36 B.R. 618 (Bankr. M.D. Tenn. 1983); In re Doyle, 11 B.R. 110 (Bankr. E.D. Pa. 1981).
8 In re Snider, 73 B.R. 17 (Bankr. S.D. Ohio 1986).
9 See In re Spiser, 232 B.R. 669, 673–74 (Bankr. N.D. Tex. 1999) (Vacates order of conversion entered after both Chapter 13 debtors died before confirmation. “A probate estate is not a ‘debtor’ eligible to convert the case to Chapter 7 under § 1307(a). . . . [C]onversion to Chapter 7 by a debtor’s probate estate is not permitted. . . . [The] order allowing conversion of this case from Chapter 13 to Chapter 7 was not permitted . . . and is, therefore, void. . . . Because the debtors are unable to fund a plan, further administration is not possible in this [Chapter 13] case. . . . [I]t appears that it would be in the best interest of the creditors for the case to be dismissed so that the Texas probate court can administer the estates.”).
10 In re Vincente, 260 B.R. 354, 361–62 (Bankr. E.D. Pa. 2001).
11 Compare the discretion to convert or dismiss on request of a party other than the debtor in 11 U.S.C. § 1307(c), discussed in § 311.2 [ Conversion on Request of Creditor or Trustee ] § 141.2 Conversion on Request of Creditor or Trustee.
12 See 11 U.S.C. § 707(b).
13 Hayes v. Disalle (In re Hayes), 293 B.R. 420, 424–25 (Bankr. N.D. Ohio 2002) (Chapter 13 debtor’s complaint to exclude real property from estate is dismissed because debtor indicated that she would convert to Chapter 7 if successful and bankruptcy court concluded that any such conversion would be a substantial abuse for § 707(b) purposes. “[T]he Plaintiff could . . . effectuate a 100% repayment plan of her unsecured creditors in just 44 months. . . . [T]he Plaintiff’s intention of converting her case to a Chapter 7 presumptively invokes § 707(b). . . . [T]he Plaintiff’s proper avenue for bankruptcy relief is under Chapter 13.”).
14 See, e.g., United States Trustee v. Harris, 960 F.2d 74 (8th Cir. 1992); In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989); In re Walton, 866 F.2d 981, 984 (8th Cir. 1989); Zolg v. Kelly (In re Kelly), 841 F.2d 908, 914 (9th Cir. 1988); In re Herbst, 95 B.R. 98, 101 (W.D. Wis. 1988); United States Trustee v. Wray (In re Wray), 136 B.R. 122, 124 (Bankr. W.D. Pa. 1992); In re Bell, 56 B.R. 637 (Bankr. E.D. Mich. 1986); In re Grant, 51 B.R. 385 (Bankr. N.D. Ohio 1985).
15 See § 103.1 In General, § 109.1 Smell Tests and discussion beginning at § 104.1 In General, § 105.1 Prepetition Conduct and Misconduct—In General, § 106.1 In General, § 107.1 Greed, Not Need and § 108.1 Economic Components of Good Faith—In General.