The Chapter 13 Conversion: Motions, Objections, and the Liquidation Test

Many debtors are under the impression that they can simply “walk away” from a Chapter 13 plan and land safely in a Chapter 7 bankruptcy. However, there are procedural hurdles involved.

In reality, converting your case is not an automatic right. It requires a formal motion, which is likely to be objected to by the Chapter 13 standing trustee. Ultimately, the bankruptcy judge will decide if the motion should be granted if you meet certain requirements, such as the Liquidation Test.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways: Handling a Chapter 13 Conversion

• The Chapter 13 Conversion Process: Under 11 U.S.C. §1307(a), you must file a formal motion to convert. This triggers a new notice period and hearing.
• The Trustee’s Financial Stake: Expect pushback from the Chapter 13 Trustee. Since their compensation is tied to plan payments, they often object to conversions to protect the administrative fees already accrued or to argue that the debtor still has the “means” to pay.
• The Liquidation Test: Once the motion is granted, the “hypothetical” liquidation test from your Chapter 13 becomes a literal reality in Chapter 7. If your prepetition assets aren’t fully covered by original exemptions, the Chapter 7 Trustee can and will sell them.
• Increased Administrative Costs: Conversion isn’t free. Debtors should budget for court filing fees and additional attorney fees, as the motion, the new 341 Meeting, and potential litigation with the Trustee fall outside the scope of the original Chapter 13 flat-fee agreement with the bankruptcy attorney.

The Motion to Convert: It’s Not Automatic

While a debtor generally has the right to convert a Chapter 13 case to Chapter 7 “at any time” under 11 U.S.C. §1307(a), the process is not a mere clerical update. It starts with your attorney filing a formal Motion to Convert or Motion for Conversion from Chapter 13 to 7.

This motion triggers a new notice period, giving the court and your creditors time to object and determine if the motion is being filed in Good Faith. For example, if the court suspects you are converting merely to shield a recent inheritance or a sudden spike in income, bonuses, etc., the motion can be denied under §348(f).

The Trustee’s Objection: Follow the Money

One of the most common “hidden” hurdles in a conversion is the Chapter 13 Trustee. It is important to remember that Chapter 13 Trustees are funded by a percentage of the payments made through your plan, often up to 10%.

When you convert to Chapter 7, that revenue stream vanishes. Consequently, it is not uncommon for a Chapter 13 Trustee to file an objection to your motion. They may argue:

• Feasibility: That you actually can afford the payments and are converting in bad faith.
• Pre-conversion Funds: They may fight to keep any undistributed funds currently sitting in their account to pay administrative expenses or attorney fees rather than returning them to you.

The Liquidation Test: The Final Hurdle

Even if you overcome the Standing Trustee’s objection, you must still satisfy the Liquidation Test. Upon conversion, the Chapter 7 Trustee steps in with one goal: finding non-exempt assets to sell.

You must prove that your assets, valued at the time of your original filing, are fully protected by exemptions. If not, the Liquidation Test requires that non-exempt assets or unprotected equity are the amount that unsecured creditors would have received in a hypothetical Chapter 7 bankruptcy.

The Liquidation Test is what unsecured creditors, such as credit cards would have received in the bankruptcy plan.

The Cost of Transition

Finally, debtors must be prepared for the financial reality of their legal representation. A conversion requires:

Additional Attorney Fees: Your lawyer is required to draft the motion and schedule the hearing before the bankruptcy judge. A new 341 Meeting of Creditors will also have to be scheduled for the Chapter 7 case. These additional steps would not have been included in the original Chapter 13 fee.

Administrative Fees: The court charges a fee to convert the case.

The Professor’s Conclusion

Conversion from Chapter 13 to 7 is a strategic pivot, but it’s not automatic. It not only requires determining if this is the best move you can make financially and procedurally with your Chapter 13 case, but it also requires your bankruptcy attorney to argue in your favor over the objections of the Standing Trustee, as well as unsecured creditors.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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