Cite as: Keith M. Lundin, Lundin On Chapter 13, § 150.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
After a debtor has once converted from Chapter 13 to Chapter 7, the Code seems to prohibit reconversion to Chapter 13. 11 U.S.C. § 706(a) is worded that “the debtor may convert a case under this chapter [Chapter 7] to a case under chapter 11, 12 or 13 of this title at any time, if the case has not been converted under section 1112, 1208 or 1307 of this title.”1 The legislative history to § 706(a) explains:
Subsection (a) of this section gives the debtor the one-time absolute right of conversion of a liquidation case to a[n] . . . individual repayment plan case. If the case has already once been converted from Chapter . . . 13 to Chapter 7, then the debtor does not have that right. The policy of the provision is that the debtor should always be given the opportunity to repay his debts, and a waiver of the right to convert a case is unenforceable.2
Several courts have considered § 706(a) and concluded that a Chapter 13 debtor cannot convert from Chapter 13 to Chapter 7 and then reconvert to Chapter 13.3 Other reported decisions, on several theories, have permitted Chapter 13 debtors to convert from one chapter to another and then to Chapter 13. For example, the court in In re Sensibaugh4 held that in the absence of objection a debtor can convert from Chapter 7 to Chapter 13 despite a prior conversion to Chapter 7 from Chapter 11. In re Hollar5 holds that conversion from Chapter 11 to Chapter 7 exhausts the debtor’s “absolute right” to convert; however, “permissive” conversion from Chapter 7 to Chapter 13 is still possible because public policy favors repayment of debt: “Absent abuse of the bankruptcy laws or other extraordinary circumstances . . . debtors otherwise eligible for Chapter 13 relief should not be barred from permissively converting to that chapter.”6 A request for reconversion “founded upon genuine desire and ability to confirm a plan” supported conversion back to Chapter 13 after a conversion from Chapter 13 to Chapter 7 in In re Johnson.7 One court discussed at length the mechanics of the Chapter 13 case after reconversion from Chapter 7, but without analysis whether reconversion was permissible in the first instance.8
The message of these cases for debtors is go ahead and try reconversion from Chapter 7 to Chapter 13 if circumstances change and it appears that a Chapter 13 plan is now possible.
If the first conversion was from Chapter 13 to Chapter 11,9 there is no statutory prohibition in Chapter 11 against reconversion similar to § 706(a).10 There is no provision in Chapter 12 for conversion to Chapter 13; thus, there is no treatment in the Code of the possibility of reconversion.11
On the theory that conversion from Chapter 13 to Chapter 7 “nullifies” the order confirming the Chapter 13 plan, the court in In re Green12 held that upon reconversion from Chapter 7 to Chapter 13 the debtor must propose a new plan and cannot simply pick up the original plan where it left off at the first conversion. Without analyzing the propriety of reconversion, the Green court held that upon reconversion to Chapter 13 the best-interests-of-creditors test was measured as of the original Chapter 13 petition, not the date of reconversion, thus “assets acquired postpetition will not be used to determine the hypothetical dividend to creditors under section 1325(a)(4).”13 But in Green there was an error in a proof of claim filed by a mortgage holder in the original Chapter 13 case. When corrected, the amount of the mortgage holder’s claim was less than at the first confirmation, and the debtor’s equity was greater. At reconversion to Chapter 13, the “newly discovered value” was treated as if it had been there all the time. At confirmation in the second Chapter 13 case “a higher dividend to unsecured creditors is required in order to comply with confirmation requirements of the Bankruptcy Code.”14
More controversially, because 45 months had passed between entry of the income deduction order and conversion from Chapter 13 to Chapter 7, at reconversion the court in Green refused to confirm any plan longer than 15 additional months:
In this case, Debtor paid under the original plan for forty-five (45) months, counting from the time payments were commenced in November 1989, to the time the case was converted to Chapter 7 in August 1993. A time period longer than fifteen (15) months, i.e., the time remaining under the original sixty (60) month time limit, could be considered unreasonable delay and evidence of bad faith. Unreasonable delay as grounds for dismissal in tandem with the good faith requirement for confirmation forbids Debtor from circumventing the rules of the Bankruptcy Code and receiving a fresh sixty (60) months each time a case is reconverted to Chapter 13, especially considering the time interval during which the case was pending in Chapter 7 status.15
Although Green allows reconversion to Chapter 13 without comment, the court’s analysis of confirmation after reconversion is hostile to the debtor’s efforts. If the first conversion from Chapter 13 to Chapter 7 “nullifies” the confirmation order, it is not obvious why the court tacked the length of the first plan onto the second to limit the debtor to only 15 additional months.16
Parts of the court’s analysis in Green are overcome by the Bankruptcy Reform Act of 1994. In cases filed after October 22, 1994, § 348(f) redefines the estate at conversion from Chapter 13 and provides that valuations of property and of allowed secured claims in the Chapter 13 case “shall apply” in the converted case.17 The holding in Green that conversion from Chapter 13 to Chapter 7 “nullifies” the confirmation order is not accurate in cases filed after October 22, 1994—to the extent the confirmation order fixes the value of property or of allowed secured claims, the confirmation order shall apply in the Chapter 7 case. Also, § 348(f)(1)(B) will reduce allowed secured claims at conversion to reflect payments in accordance with the Chapter 13 plan.18
A question not answered by the 1994 amendments is whether reconversion from Chapter 7 to Chapter 13 preserves the effects of the first Chapter 13 case. Put another way, it is clear from § 348(f) that orders entered and payments made during the Chapter 13 case have substantial effects on the rights of creditors at conversion from Chapter 13 to Chapter 7;19 at reconversion from Chapter 7 to Chapter 13, § 348(f) does not apply, but do the effects of the first Chapter 13 case follow the debtor through the Chapter 7 case and into the second Chapter 13 case?
Imagine a Chapter 13 case filed after October 22, 1994. At confirmation, a car lender with a $10,000 claim is treated as secured to the $7,000 value of the car and unsecured for the $3,000 balance. After 18 months under the plan, the debtor converts to Chapter 7. At conversion, the balance of the creditor’s allowed secured claim is $5,000 and the (depreciated) value of the car is $6,000.
At a good-faith conversion, the allowed amount of the car lender’s secured claim in the Chapter 7 case will be $5,000 under § 348(f).20 The debtor would be able to redeem the car under § 722 in the Chapter 7 case for a lump-sum payment of $5,000.
If the debtor reconverts to Chapter 13, is the allowed amount of the car lender’s secured claim at confirmation of the (second) Chapter 13 plan the $5,000 balance suggested by § 348(f); or will the $6,000 value of the car determine the secured claim holder’s entitlement under §§ 1325(a)(5) and 506(a)?
It might be argued that the debtor should not be penalized for trying a second time by losing the benefits of § 348(f) at reconversion to Chapter 13. Accounting for allowed secured claims at reconversion consistent with § 348(f) would entitle the claim holder to the present value of the same amount to which that creditor would have been entitled at redemption in the Chapter 7 case.
On the other hand, there is no analogue to § 348(f) applicable at (re)conversion from Chapter 7 to Chapter 13. Congress didn’t clearly provide for reconversion to Chapter 13, and it should not be presumed that the special rules in § 348(f) would be applied at a second-chance reconversion.
Bankruptcy Rule 1019 gives some guidance with respect to the filing of new lists and schedules and new time periods for proofs of claim at reconversion to Chapter 7. There is no bankruptcy rule addressing reconversion to Chapter 13. At reconversion to Chapter 13, debtors and creditors will face some of the same issues and problems encountered at a first conversion from Chapter 7 to Chapter 13.21 For example, the Code is anything but clear with respect to the status of new debt that may have arisen during the Chapter 7 case or during the first Chapter 13 case when a Chapter 7 case reconverts to Chapter 13.22 Section 348(a) and (b) probably work in the usual way at reconversion from Chapter 7 to Chapter 13, preserving the first Chapter 13 petition date and redefining the order for relief as the (re)conversion from Chapter 7 to Chapter 13 for the purposes stated in § 348(b). However, what will become of postpetition claims in the second Chapter 13 case? Debts arising after the order for relief but before conversion of the first Chapter 13 case became prepetition claims under § 348(d).23 But § 348(d) tells us nothing about the status of debts that arose after the first conversion from Chapter 13 to Chapter 7 and before reconversion from Chapter 7 to Chapter 13. Presumably, administrative expenses arising during the Chapter 7 case would be treated the same as administrative expenses at a first conversion from Chapter 7 to Chapter 13.24 The good news is that reconversion to Chapter 13 is rare enough that most of us can complete our careers without being forced to figure out the meaning of timeliness for the filing of proofs of claim after reconversion.25
One reported decision does answer the question whether reconversion to Chapter 13 after conversion from Chapter 13 to Chapter 7 reimposes the automatic stay with respect to a creditor that was granted relief from the stay during the Chapter 7 case. In In re Bryant,26 the bankruptcy court applied the general rule that “conversion of a case from one chapter to another under the Bankruptcy Code does not automatically reimpose the automatic stay.”27 After reconversion, the Bryant court suggested that the debtor could file an adversary proceeding to enjoin a collection action by the creditor that was granted relief from the stay during the Chapter 7 case.
1 11 U.S.C. § 706(a) (emphasis added).
2 S. Rep. No. 95-989, at 94 (1978). See also H.R. Rep. No. 95-595, at 380 (1977).
3 See In re Hardin, 301 B.R. 298, 300 (Bankr. C.D. Ill. 2003) (“The language of Section 706(a) gives debtors a right to convert only if the case has not previously been converted. . . . Since the DEBTOR previously exercised her right to convert from Chapter 13 to Chapter 7, she no longer has the option of re-converting back to Chapter 13.”); In re Baker, 289 B.R. 764, 766–67 (Bankr. M.D. Ala. 2003) (Once a Chapter 13 case has been voluntarily converted to Chapter 7, the case cannot be reconverted to Chapter 13 under § 706(a). “If there has been a previous conversion, as in this case, the debtor is not entitled to use Section 706(a) to convert her case to another chapter. . . . [A] prior conversion would not disqualify a party in interest from making a motion under subsection (b). This is in contrast to subsection (a) which is unavailable if there has been a prior conversion.”); In re Banks, 252 B.R. 399, 400–03 (Bankr. E.D. Mich. 2000) (A Chapter 13 case, once converted to Chapter 7, cannot be reconverted to Chapter 13. “The cases are divided on the issue of whether a case previously converted to chapter 7 may be reconverted to chapter 11, 12, or 13. . . . The Court concludes that subsection (a) does contain some ambiguity . . . . [I]t does not explicitly address the debtor’s rights if there has been a previous conversion. . . . The legislative history refers to a ‘one-time absolute right to convert.’ . . . The legislative history does not shed light on whether the right that is lost is a right to request conversion in the court’s discretion or an absolute right to convert. Indeed, nothing in the legislative history refers to either a strict prohibition against re-conversion by right or against re-conversion in the court’s discretion. . . . The lack of clarity in the legislative history allows both sides to cite it in support of their respective positions. The Court concludes that because there is no discussion in the legislative history that subsection (c) itself was intended to establish a right of re-conversion that is subject to the court’s discretion, it is more likely that Congress did not intend subsection (c) to create such a right and did intend subsection (a) to prohibit re-conversion. . . . Reading subsection (a) as prohibiting a debtor from converting the case if there has been a prior conversion does not render any other subsection of § 706 meaningless. . . . [T]he Court concludes that ‘a debtor’s right to convert is lost once it has been exercised.’ . . . If Congress has intended to give debtors a one time guaranteed right to convert and an additional right to request re-conversion in the court’s discretion, it would have done so much more explicitly.”); In re Richardson, 43 B.R. 636 (Bankr. M.D. Fla. 1984) (Debtor who filed a Chapter 13 case and converted to Chapter 7 cannot reconvert to Chapter 13. Reconversion is prohibited by § 706.). Accord Gualtieri v. Goux, 65 B.R. 121 (Bankr. N.D.N.Y. 1986); Ghosh v. Financial Fed. Sav. & Loan Ass’n, 38 B.R. 600 (Bankr. E.D.N.Y. 1984).
4 9 B.R. 45 (Bankr. E.D. Va. 1981).
5 70 B.R. 337 (Bankr. E.D. Tenn. 1987).
6 70 B.R. at 338.
7 116 B.R. 224 (Bankr. D. Idaho 1990).
8 See In re Green, 169 B.R. 480 (Bankr. S.D. Ga. 1994), discussed below in this section. Accord In re Bryant, 296 B.R. 516 (Bankr. D. Colo. 2003) (Without discussion, after conversion from Chapter 13, Chapter 7 case is reconverted to Chapter 13.).
9 See § 146.1 Standing, Procedure and Grounds for Conversion to Chapter 11, § 146.2 Strategic Considerations: Costs and Benefits of Conversion to Chapter 11 and § 146.3 Incentives to Convert to Chapter 11 after BAPCPA.
10 See 11 U.S.C. § 1112(d).
11 See § 327.2 [ Conversion from Chapter 12 to Chapter 13 ] § 149.2 Conversion from Chapter 12 to Chapter 13.
12 169 B.R. 480 (Bankr. S.D. Ga. 1994).
13 169 B.R. at 482.
14 169 B.R. at 482–83.
15 169 B.R. at 483.
16 See discussion beginning at § 112.1 General Rule: Three Years, More or Less.
17 11 U.S.C. § 348(f), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994). See § 143.2 In Cases Filed after October 22, 1994, § 143.3 Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA, § 145.2 In Cases Filed after October 22, 1994 and § 145.3 Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.
19 See § 143.2 In Cases Filed after October 22, 1994, § 143.3 Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA, § 144.1 Exemptions at Conversion, § 145.2 In Cases Filed after October 22, 1994 and § 145.3 Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.
20 See 11 U.S.C. § 348(f)(1)(B), discussed in § 145.2 In Cases Filed after October 22, 1994 and § 145.3 Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.
26 296 B.R. 516 (Bankr. D. Colo. 2003).
27 296 B.R. at 519.