§ 148.4     Conversion to Chapter 13 after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 148.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The general rules for conversion to Chapter 13 from Chapter 71 and from other chapters2 were not materially changed by BAPCPA. Section 706(c) was slightly modified to provide that a Chapter 7 case may not be converted to Chapter 13 unless the debtor either requests “or consents to” conversion. The addition of consent reflects other BAPCPA amendments to § 707(b)(1).3

[2]

To believe the proponents of BAPCPA, there will be more conversions from Chapter 7 to Chapter 13 because of the new “abuse” test in § 707(b). Prior to BAPCPA, § 707(b) specified dismissal as the only consequence when the bankruptcy court found that granting relief under Chapter 7 would be a substantial abuse of the provisions of Chapter 7.4 BAPCPA changed § 707(b) in many important ways including adding the option that “with the debtor’s consent,” the Chapter 7 case can be converted to Chapter 11 or Chapter 13 if the court finds that granting relief under Chapter 7 would be an abuse of the provisions of Chapter 7.5

[3]

It is fair to say that the drafters of BAPCPA imagined the new “abuse” test in § 707(b) would force or convince some debtors to convert from Chapter 7 to Chapter 13. As stated in the House Report, “[i]f needs-based reforms and other measures were implemented, the rate of repayment to creditors would increase as more debtors were shifted into chapter 13.”6 Time will tell whether the new abuse test in § 707(b) increases the percentage of consumer bankruptcy cases that are commenced in or converted to Chapter 13.

[4]

Without regard to filing patterns or conversion rates, the new abuse test in § 707(b) will have collateral effects on debtors who start in a Chapter 7 case and convert to Chapter 13. The documents the debtor must file to commence the Chapter 7 case include a new form Official Form B22A: “Statement of Current Monthly Income and Means Test Calculation.” Current monthly income (CMI) for purposes of new Official Form B22A in a Chapter 7 case will be the same CMI applicable in the Chapter 13 case after conversion. Under new § 101(10A), CMI is based on the average monthly income of the debtor during the six months ending on the last day of the calendar month preceding “the date of the commencement of the case” if the debtor files the Schedule of Current Income required by § 521(a)(1)(B)(ii).7 Most Chapter 7 debtors do file the schedule of current income—Schedule I to Official Form 68—and thus the six months preceding commencement of the case will control the calculation of CMI.

[5]

Under § 348(a), conversion of a case from Chapter 7 to Chapter 13 does not change the commencement of the case for purposes of the CMI calculation in § 101(10A). In other words, if the Chapter 7 debtor files the Schedule of Current Income, CMI in the Chapter 7 case will be based on the six months preceding the month in which the Chapter 7 case was filed and, after conversion to Chapter 13, CMI will still be based on the six months before the month in which the Chapter 7 case was filed—without regard to how much time passes between filing of the original Chapter 7 petition and conversion to Chapter 13.

[6]

There is a narrow possibility under § 101(10A) that the CMI calculation will change after conversion from Chapter 7 to Chapter 13. Under new § 101(10A)(A)(ii), if the debtor does not file the Schedule of Current Income required by § 521(a)(1)(B)(ii), CMI is determined based on the six-month period ending when CMI “is determined by the court for purposes of this title.”9 The Chapter 7 debtor who fails to file a Schedule of Current Income invites the possibility that the bankruptcy court will determine CMI at a date other than commencement of the Chapter 7 case. There is nothing in § 348 that would preserve that timing for the CMI calculation in the event of conversion to Chapter 13.

[7]

The determination of CMI is fundamental to the abuse test in § 707(b)(1), and any determination of CMI during the Chapter 7 case may have preclusive effects at conversion to Chapter 13. CMI is the fundamental mathematical platform from which all of the important calculations are made in a Chapter 13 case.10 Lack of attention to the CMI calculation in Official Form B22A during a Chapter 7 case could substantially prejudice the debtor in the event of conversion to Chapter 13.

[8]

Don’t be misled: the “abuse” test in § 707(b)(1) contains many but not all the same numbers as the important calculations in a Chapter 13 case after conversion from Chapter 7. For debtors with CMI less than applicable median family income, with the exception of the calculation of CMI itself, most of the abuse test in § 707(b) is not relevant or applicable during the Chapter 13 case.11 For a debtor with CMI greater than applicable median family income, parts of the abuse test in § 707(b) are applicable to determine disposable income under § 1325(b)(2),12 but there are significant deductions and allowances to determine disposable income that are not in § 707(b). For example, charitable contributions that are excluded from abuse analysis under § 707(b)(1) are not deducted from CMI to arrive at “amounts reasonably necessary to be expended—” as part of the disposable income calculation for a Chapter 13 debtor with CMI greater than applicable median family income under § 1325(b)(3).13 For purposes of the presumption of abuse in a Chapter 7 case in § 707(b)(2)(A)(i), the calculation begins with “the debtor’s current monthly income.”14 After conversion to Chapter 13, the disposable income test at confirmation in § 1325(b)(2) begins with the “current monthly income received by the debtor (other than child support payments, foster care payments or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child).”15 There are thus significant differences between the abuse test in § 707(b) and the disposable income test in § 1325(b)—even for a debtor with CMI over median family income who might be forced by the abuse test to convert from Chapter 7 to Chapter 13 and who then faces elements of the abuse test to determine disposable income at confirmation.

[9]

The abuse test in § 707(b) could affect success in other ways after conversion to Chapter 13. For a debtor with CMI less than applicable median family income, the abuse test in § 707(b) includes “whether the debtor filed the petition in bad faith.”16 An under-median-income debtor booted out of Chapter 7 on a finding of bad faith is not disqualified to convert to Chapter 13, but the issue is then presented whether that finding of bad faith would also be a ground for dismissal of the Chapter 13 case after conversion or for denial of confirmation under § 1325(a)(3).17

[10]

BAPCPA added a new paragraph (7) to § 1325(a) that conditions confirmation that “the action of the debtor in filing the petition was in good faith.”18 “The petition” in new § 1325(a)(7), of course, refers to the Chapter 13 petition in the ordinary case; but after conversion from Chapter 7, is “the petition” in new § 1325(a)(7) the Chapter 7 petition or something else—for example, the conversion of that case to Chapter 13? Under § 348(a) and (b), conversion from Chapter 7 to Chapter 13 does not change “the date of the filing of the petition” though it does substitute conversion for the “order for relief” for some purposes.19

[11]

If “the petition” in new § 1325(a)(7) is interpreted to mean the filing of the Chapter 7 petition, then any debtor found to have filed the Chapter 7 case in bad faith for purposes of the abuse test in § 707(b)(3)(A) would have to win the argument at conversion that “bad faith” in § 707(b)(3)(A) is not the flip side of “good faith” in § 1325(a)(7). More likely, “the petition” for purposes of § 1325(a)(7) should not be interpreted to mean the Chapter 7 petition when a Chapter 7 case has converted to Chapter 13.

[12]

The “good faith” at issue in § 1325(a)(7) is good faith in the Chapter 13 case. It does not make sense that Congress intended any debtor found to have filed an abusive Chapter 7 case would be disabled to confirm a Chapter 13 plan after conversion. That intent would have been manifested in a prohibition of conversion to Chapter 13 from Chapter 7 after a finding of abuse based on bad faith. Instead, BAPCPA added the consent-to-conversion option to § 707(b)(1). A bad-faith finding of abuse of the provisions of Chapter 7 should not be preclusive of good faith for purposes of confirming a Chapter 13 plan under § 1325(a)(7).

[13]

In this regard, it has to be admitted that § 1325(a)(3) specifically measures the good faith of the debtor with respect to proposing the Chapter 13 plan. New § 1325(a)(7) measures the debtor’s good faith with respect to the filing of the petition.20 Policy arguments can be made that good faith and bad faith mean different things in the context of measuring abuse of Chapter 7 and confirmation after conversion to Chapter 13. Section 707(b), as amended by BAPCPA, and the legislative history quoted above indicate that Congress contemplated that debtors failing the abuse test in § 707(b) would be encouraged to convert to Chapter 13. It would not be encouraging of conversion from Chapter 7 to Chapter 13 upon a finding of abuse under § 707(b) that the debtor would then be precluded from confirming a plan because of new § 1325(a)(7).

[14]

Interim Rule 1019 addresses the documents that must be filed and time periods that are affected at conversion (or reconversion) from Chapter 13 to Chapter 7.21 But Interim Rule 1019 tells us nothing about documents that must be filed or time periods that are affected by conversion from Chapter 7 to Chapter 13.

[15]

New questions in this regard are framed by the BAPCPA amendments to the discharge provisions of Chapter 13. BAPCPA added many new exceptions to discharge at the completion of payments in a Chapter 13 case, including the “fraud” exceptions in § 523(a)(2) and (a)(4).22 Interim Rule 4007(c) was quickly constructed to fix a deadline for the filing of complaints objecting to the dischargeability of a debt in a Chapter 13 case under § 523(a)(2) and (a)(4). Under pre-BAPCPA law, there was no need for that deadline because none of the § 523(c) exceptions to dischargeability were applicable in a Chapter 13 case at the completion of payments under § 1328(a). BAPCPA changed that with respect to § 523(a)(2) and (a)(4), and Bankruptcy Rule 4007(c) was amended to provide, in a Chapter 13 case, a complaint under § 523(a)(2) or (a)(4) must be filed “no later than 60 days after the first date set for the meeting of creditors under section 341(a).”23

[16]

What is the deadline for filing a complaint objecting to the dischargeability of a debt under § 523(a)(2) or (a)(4) after conversion from Chapter 7 to Chapter 13? It will be argued from Interim Rule 4007(c) that the “first date set for the meeting of creditors under section 341(a)” is the meeting of creditors in the Chapter 13 case after conversion. By this logic, there are 60 days after that first date set for the meeting of creditors in the Chapter 13 case in which a creditor can timely file a complaint to determine dischargeability of a debt under § 523(a)(2) or (a)(4) after conversion from Chapter 7.

[17]

But it is also true that there was a “first date set for the meeting of creditors under section 341(a)” during the Chapter 7 case. A creditor’s opportunity to timely file a complaint objecting to dischargeability under § 523(a)(2) or (a)(4) could expire once and for all in the Chapter 7 case before conversion. There is support for this argument in Interim Rule 1019(2), which specifically starts a new time period for filing a complaint to determine dischargeability under Bankruptcy Rule 4007 when a Chapter 13 case is converted (or reconverted) to a Chapter 7 case, but the Rule is silent with respect to commencement of a new period when a Chapter 7 case is converted to Chapter 13. Interim Rule 1019(2) provides that a new time period for filing a complaint to determine dischargeability under Bankruptcy Rule 4007 does not arise if a Chapter 7 case was converted to Chapter 11, 12 or 13 and thereafter reconverted to Chapter 7 and the time for filing a dischargeability complaint expired during the original Chapter 7 case.24

[18]

It is, of course, quite possible that more than 60 days will pass after the first date set for the meeting of creditors in a Chapter 7 case and the Chapter 7 case will then be converted to Chapter 13. If the time for filing a complaint objecting to dischargeability under § 523(a)(2) or (a)(4) expired during the Chapter 7 case before conversion, a strong argument by analogy to Interim Rule 1019(2) can be made that a new period for objecting to dischargeability is not triggered by conversion from Chapter 7 to Chapter 13.

[19]

There is some logic and plausible policy behind the provision in Interim Rule 1019(2) that commences a new time period for objecting to the dischargeability of a debtor at conversion (or reconversion) from Chapter 13 to Chapter 7. Debts that might be nondischargeable under § 523(a)(2) or (a)(4) if provided for robustly through the Chapter 13 plan might not require a determination of dischargeability during the Chapter 13 case. A creditor with a debt that might be nondischargeable under § 523(a)(2) or (a)(4) is more likely to negotiate a fair treatment through the Chapter 13 plan—obviating the need to file a complaint—if the creditor knows that there will be a second opportunity to determine dischargeability if the Chapter 13 case fails. Interim Rule 1019(2) provides that second opportunity.

[20]

But this logic is backward if the case began as a Chapter 7 case. The creditor with a debt that might be nondischargeable under § 523(a)(2) or (a)(4) has every incentive to timely file a complaint objecting to dischargeability in the Chapter 7 case. If the creditor does not embrace that opportunity, then it is not obvious why conversion from Chapter 7 to Chapter 13 should rekindle a time period for dischargeability litigation in the Chapter 13 case. There would certainly be no new period if the case first converted from Chapter 7 to Chapter 13 and then reconverted to Chapter 7 after the time period for objecting to dischargeability expired during the original Chapter 7 case—that is exactly the exception at reconversion contained in Interim Rule 1019(2).25

[21]

The rules drafters should consider a new bankruptcy rule dealing with conversion from Chapter 7 to Chapter 13. If the drafters of BAPCPA are correct, the volume of conversions from Chapter 7 to Chapter 13 will be increased by the new “abuse” test in § 707(b). The addition of § 523(a)(2) and (a)(4) as exceptions to discharge at the completion of payments under a Chapter 13 plan creates the need for guidance with respect to the deadline for filing a complaint objecting to dischargeability under Bankruptcy Rule 4007 at conversion from Chapter 7 to Chapter 13 when more than 60 days passed after the first date set for the meeting of creditors during the Chapter 7 case. The rule should be that no new period for objecting to the dischargeability of a debt under Rule 4007 arises at conversion from Chapter 7 to Chapter 13 if the 60-day period in Rule 4007 expired during the Chapter 7 case prior to conversion. Any different rule extracts a nonstatutory penalty for conversion from Chapter 7 to Chapter 13.

[22]

Similar issues will arise (but less often) at conversion to Chapter 13 from Chapter 11. The policy arguments are somewhat stronger in favor of a rule that conversion from Chapter 11 to Chapter 13 should restart the 60-day period for filing a complaint objecting to the dischargeability of debt under Bankruptcy Rule 4007(c).

[23]

At conversion from Chapter 7 or Chapter 11 to Chapter 13, there is a technical problem with the commencement of payments in the Chapter 13 case.26 New § 1326(a)(1) requires the debtor to commence making payments “not later than 30 days after . . . the order for relief.”27 Under § 348(a), conversion from Chapter 7 or Chapter 11 to Chapter 13 does not effect a change in the date of the order for relief for § 1326(a)(1) purposes. This creates a nonsense that at conversion to Chapter 13, the debtor is required to commence making payments not later than 30 days after the order for relief in the Chapter 7 or Chapter 11 case from which the debtor came. A correcting citation somewhere in § 348 was overlooked by the drafters of BAPCPA. Perhaps the courts will correct this omission and time the 30-day period for the commencement of payments from the date of conversion from Chapter 7 or Chapter 11 to Chapter 13.

[24]

Finally, a brief mention of the weirdness in new § 1326(b)(3) that can arise after conversion to Chapter 13. As amended by BAPCPA, § 1326(b)(3) provides that “there shall be paid” at the same time as payments to creditors under a Chapter 13 plan the compensation of a (former) Chapter 7 trustee, described as follows:

(3) if a chapter 7 trustee has been allowed compensation due to the conversion or dismissal of the debtor’s prior case pursuant to section 707(b), and some portion of that compensation remains unpaid in a case converted to this chapter or in the case dismissed under section 707(b) and refiled under this chapter, the amount of any such unpaid compensation, which shall be paid monthly—
(A) by prorating such amount over the remaining duration of the plan; and
(B) by monthly payments not to exceed the greater of—
(i) $25; or
(ii) the amount payable to unsecured nonpriority creditors, as provided by the plan, multiplied by 5 percent, and the result divided by the number of months in the plan.28
[25]

New § 1326(b)(3) contemplates payments after conversion to Chapter 13 of compensation allowed to a Chapter 7 trustee “due to” the conversion or dismissal of a debtor’s “prior case” pursuant to § 707(b). This is an odd fact pattern given that compensation of a Chapter 7 trustee requires that money be disbursed or turned over under § 1326(a)—something that rarely happens before conversion or dismissal for abuse under § 707(b).

[26]

This strange new provision for payment of compensation allowed to a former Chapter 7 trustee applies in a case converted to Chapter 13 or refiled under Chapter 13 after dismissal. Under new § 1326(d), the former Chapter 7 trustee is entitled to the payments of compensation described “even if such amount has been discharged in a prior case under this title.”29 It is a stretch to imagine the combination of filings, conversions, dismissals and discharges that would produce a former Chapter 7 trustee with a discharged debt for unpaid compensation due to the conversion or dismissal of a prior Chapter 7 case under § 707(b) who would then be entitled to payment in a subsequent case refiled or converted to Chapter 13. When it happens, you will know it.


 

1  See discussion beginning at § 148.1  Procedure.

 

2  See §§ 327.1 [ Conversion from Chapter 11 to Chapter 13 ] § 149.1  Conversion from Chapter 11 to Chapter 13 and 327.2 [ Conversion from Chapter 12 to Chapter 13 ] § 149.2  Conversion from Chapter 12 to Chapter 13.

 

3  See below in this section.

 

4  See 11 U.S.C. § 707(b)(1) prior to amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

 

5  11 U.S.C. § 707(b)(1).

 

6  H.R. Rep. No. 109-31, at 18.

 

7  See 11 U.S.C. § 101(10A)(A)(i), discussed in §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19  Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

8  See § 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16  Schedules I and J—Income and Expenditures.

 

9  11 U.S.C. § 101(10A)(A)(ii), discussed in § 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

10  See § 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

11  There are exceptions to this statement such as the “bad faith” discussion below in this section.

 

12  See 11 U.S.C. § 1325(b)(2) and (3), discussed beginning at § 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60 and § 98.1  Additional Expenses or Adjustments to CMI.

 

13  See § 470.1 [ Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Applicable Median Family Income ] § 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income.

 

14  11 U.S.C. § 707(b)(2)(A)(i).

 

15  11 U.S.C. § 1325(b)(2), discussed in § 467.1 [ Projected Disposable Income: All Debtors ] § 92.2  Projected Disposable Income: All Debtors.

 

16  11 U.S.C. § 707(b)(3)(A).

 

17  See 11 U.S.C. § 1325(a)(3), discussed in § 103.1  In General§ 104.1  In General§ 105.1  Prepetition Conduct and Misconduct—In General§ 106.1  In General§ 107.1  Greed, Not Need§ 108.1  Economic Components of Good Faith—In General§ 109.1  Smell Tests and § 110.1  Good-Faith Filing Requirement after BAPCPA.

 

18  11 U.S.C. § 1325(a)(7), discussed in § 496.1 [ Good-Faith Filing Requirement ] § 110.1  Good-Faith Filing Requirement after BAPCPA.

 

19  See 11 U.S.C. § 348(a) and (b), discussed in § 532.1 [ Notice Issues under § 342 at Conversion ] § 142.4  Notice Issues under § 342 at Conversion.

 

20  11 U.S.C. § 1325(a)(7), discussed in § 496.1 [ Good-Faith Filing Requirement ] § 110.1  Good-Faith Filing Requirement after BAPCPA.

 

21  Conversion from Chapter 13 to Chapter 7 is discussed in §§ 529.1 [ New Grounds for Conversion after BAPCPA ] § 141.4  Cause for Conversion Added or Changed by BAPCPA–535.1; reconversion to Chapter 7 from Chapter 13 is discussed in § 539.1 [ Reconversion to or from Chapter 13 ] § 150.2  Reconversion to Chapter 13 after BAPCPA.

 

22  See 11 U.S.C. § 523(a)(2) and (a)(4), discussed in §§ 549.1 [ False Representations and Fraud: § 523(a)(2) ] § 159.2  False Representations and Fraud: § 523(a)(2) and 550.1 [ Fraud and Defalcation: § 523(a)(4) ] § 159.3  Fraud and Defalcation: § 523(a)(4).

 

23  Interim Bankr. R. 4007(c), discussed in § 544.1 [ Time for Determining Dischargeability of Debt ] § 156.3  Time for Determining Dischargeability of Debt.

 

24  See Interim Bankr. R. 1019(2), discussed in § 539.1 [ Reconversion to or from Chapter 13 ] § 150.2  Reconversion to Chapter 13 after BAPCPA.

 

25  Interim Bankr. R. 1019(2) is discussed further in § 539.1 [ Reconversion to or from Chapter 13 ] § 150.2  Reconversion to Chapter 13 after BAPCPA.

 

26  See § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

27  11 U.S.C. § 1326(a)(1), discussed in §§ 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA and 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA.

 

28  11 U.S.C. § 1326(b)(3), discussed in §§ 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA and 556.1 [ Chapter 7 Trustee Compensation: § 1326(d) ] § 159.9  Chapter 7 Trustee Compensation: § 1326(d).

 

29  11 U.S.C. § 1326(b)(1), discussed more fully in § 556.1 [ Chapter 7 Trustee Compensation: § 1326(d) ] § 159.9  Chapter 7 Trustee Compensation: § 1326(d).