WHEN A CHAPTER 7 PETITION CAN BE CONVERTED TO OTHER PETITION OR DISMISSED ?
Section 706 of the Bankruptcy Code governs the conversion of a bankruptcy case from Chapter 7 to another chapter of the Bankruptcy Code. Conversion does not terminate the bankruptcy case, rather, it changes the chapter under which the case is administered. For an individual debtor, the most important and common form of conversion is the conversion of a Chapter 7 case to a Chapter 13 case. Conversion may become relevant where the debtor initially seeks liquidation under Chapter 7 but later determines that reorganization under Chapter 13 would be more appropriate. For example, a debtor may seek conversion in order to retain property that might otherwise be liquidated by the Chapter 7 trustee, while repaying creditors through a Chapter 13 plan.
Conversion under §706 may generally be sought at any time while a Chapter 7 case is pending, provided that the statutory requirements for conversion are satisfied. Conversion is not restricted to any particular procedural stage and may occur before or after the §341 meeting, and even after the trustee has begun administering estate property. However, the debtor must be eligible for the chapter to which conversion is sought, and other limitations contained in §706 must be satisfied. Thus, the filing of a Chapter 7 petition does not permanently lock the debtor into Chapter 7; while the case remains pending, §706 may provide a mechanism for moving the case to another chapter when the statutory requirements are met.
Debtor’s Right to Convert
Under §706(a), a debtor may generally convert a Chapter 7 case to a case under Chapter 11, Chapter 12, or Chapter 13. The right under §706(a), however, is not unlimited. The debtor must satisfy the eligibility requirements applicable to the chapter into which the case is being converted. For example, a debtor seeking to convert to Chapter 13 must be eligible to be a Chapter 13 debtor under the applicable provisions of the Bankruptcy Code. The debtor cannot use §706(a) to convert to a chapter for which the debtor is legally ineligible. Section 706(a) also contains a limitation concerning a case that has previously been converted from the chapter to which conversion is sought.
In Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), the Supreme Court considered a debtor’s statutory right to convert a Chapter 7 case to Chapter 13. The Court held that the right to convert under §706(a) is not absolute where the debtor is ineligible for Chapter 13 relief because of bad-faith conduct. The decision illustrates that bankruptcy rights granted by the Code must be exercised consistently with the statutory eligibility requirements and the debtor’s conduct in the bankruptcy process. It also demonstrates that the Bankruptcy Code does not permit a debtor to use procedural rights as a means of obtaining relief to which the debtor is substantively ineligible.
Conversion from Chapter 7 to 13
Conversion from Chapter 7 to Chapter 13 can be particularly important for an individual debtor who wishes to retain property that might otherwise be subject to liquidation. In a Chapter 7 case, the trustee generally administers non-exempt property for the benefit of creditors. By contrast, Chapter 13 provides an eligible individual with an opportunity to propose a repayment plan and, subject to the requirements of Chapter 13, retain property while making payments over the applicable plan period.
Conversion, however, does not automatically eliminate all consequences of the original Chapter 7 filing. Once the case is converted, the case becomes subject to the requirements applicable to the new chapter. The debtor must therefore comply with the applicable Chapter 13 requirements, including proposing and obtaining confirmation of a Chapter 13 plan and making the payments required under that plan. Conversion should consequently be understood as a change in the chapter under which the bankruptcy case proceeds, rather than as the filing of an entirely new bankruptcy case.
Conversion to Chapter 11
Under §706(b), the bankruptcy court may convert a Chapter 7 case to a case under Chapter 11 at the request of a party in interest and after notice and a hearing, provided that the debtor is eligible to be a debtor under Chapter 11. Unlike §706(a), which generally addresses the debtor’s right to convert, §706(b) specifically addresses conversion to Chapter 11 upon the request of a party in interest.
Chapter 11 may be relevant where the debtor’s circumstances require a reorganization structure that is not available or appropriate under Chapter 13. For an individual debtor with substantial debts or financial circumstances that fall outside Chapter 13 eligibility requirements, Chapter 11 may provide an alternative reorganization framework, provided that the statutory requirements are satisfied.
Conversion at the Request of a Party Other Than the Debtor
Section 706(c) addresses conversion requested by a party other than the debtor. It provides that the court may not convert a case from Chapter 7 to another chapter under §706 unless the debtor consents to the conversion. Thus, where a creditor or another party in interest seeks conversion of a Chapter 7 case under this provision, the debtor’s consent becomes significant.
This provision reflects the fact that conversion can materially change the debtor’s rights and obligations. Conversion from Chapter 7 to another chapter may subject the debtor to a repayment plan, different eligibility requirements, different trustee or administrative procedures, and different consequences concerning property and claims. Accordingly, §706(c) places a limitation on conversion initiated by a party other than the debtor.
Eligibility Requirement
Section 706(d) establishes an important limitation on conversion. It provides that a case may not be converted to a chapter unless the debtor may be a debtor under such chapter. In other words, conversion is available only where the debtor satisfies the eligibility requirements of the chapter to which the case is being converted.
For example, an individual debtor cannot convert a Chapter 7 case to Chapter 13 merely because the debtor prefers Chapter 13 treatment. The debtor must first satisfy the eligibility requirements applicable to Chapter 13. Similarly, conversion to Chapter 11 or Chapter 12 requires the debtor to qualify as a debtor under the respective chapter.
Effect of Conversion on the Bankruptcy Case
Conversion generally means that the existing bankruptcy case continues under a different chapter rather than being dismissed and replaced by a completely unrelated proceeding. The administration of the case thereafter becomes subject to the provisions governing the new chapter. The debtor’s rights and duties, the administration of property, the role of the trustee, the treatment of claims, and the procedures applicable to creditors may therefore change following conversion.
Conversion can consequently provide an important mechanism for correcting the choice of bankruptcy chapter. A debtor who initially commenced a Chapter 7 case may later determine that Chapter 13 or another chapter better serves the debtor’s legitimate financial objectives. At the same time, conversion does not provide an automatic escape from the consequences of the original bankruptcy filing or from requirements imposed by the Bankruptcy Code. The debtor must satisfy the requirements of the chapter into which the case is converted.
DISMISSAL OF PETITION
Section 707 of the Bankruptcy Code governs the dismissal of a Chapter 7 case. Dismissal brings the bankruptcy case to an end and generally prevents the debtor from receiving the ordinary benefits of a Chapter 7 discharge. Dismissal should therefore be distinguished from a discharge. A discharge releases an eligible debtor from personal liability for debts that are within the scope of the discharge, whereas dismissal terminates the bankruptcy case without providing that general discharge. The grounds and procedure for dismissal depend upon the particular circumstances of the case.
For an individual Chapter 7 debtor, the two principal provisions governing dismissal are §707(a), which deals with dismissal for cause, and §707(b), which deals with dismissal or conversion where granting Chapter 7 relief would constitute an abuse of the provisions of Chapter 7. These provisions serve different purposes and should therefore be considered separately.
Dismissal for Cause
Under §707(a), the court may dismiss a Chapter 7 case only after notice and a hearing and only for cause. The provision identifies several circumstances that constitute examples of cause for dismissal. These include unreasonable delay, or gross mismanagement, by the debtor that is prejudicial to creditors, nonpayment of any fees or charges required under Chapter 123 of title 28, and failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow, the information required by §521(a)(1).
The grounds listed in §707(a) are not necessarily exhaustive. The statute uses the phrase “including” before identifying the specified grounds, indicating that circumstances other than those expressly listed may, depending upon the facts, constitute cause for dismissal. The bankruptcy court therefore has authority to examine the overall circumstances of the case in determining whether sufficient cause exists to dismiss it.
Unreasonable Delay or Gross Mismanagement
One ground for dismissal under §707(a)(1) is unreasonable delay, or gross mismanagement, by the debtor that is prejudicial to creditors. The purpose of this provision is to prevent the debtor from using the bankruptcy process in a manner that unnecessarily delays administration of the estate or causes prejudice to creditors. Bankruptcy requires the debtor to cooperate with the trustee and comply with the procedural requirements necessary for administration of the estate. Conduct that substantially interferes with that process may provide grounds for dismissal.
Nonpayment of Required Fees
Under §707(a)(2), failure to pay fees or charges required under Chapter 123 of title 28 may constitute cause for dismissal. Bankruptcy proceedings involve statutory filing fees and other charges, and failure to comply with applicable payment requirements may result in dismissal of the case. The court generally considers the applicable circumstances and provides the required notice and opportunity for a hearing before dismissing the case on this ground.
Failure to File Required Information
Another ground expressly identified in §707(a)(3) is the debtor’s failure, in a voluntary Chapter 7 case, to file within the prescribed period the information required by §521(a)(1). Section 521 imposes important duties on a debtor, including the filing of schedules, statements, and other required information. These documents are essential for the trustee and creditors to understand the debtor’s financial condition and administer the bankruptcy estate. Failure to provide the required information can therefore constitute cause for dismissal.
Dismissal for Abuse
In addition to dismissal for cause under §707(a), §707(b) provides a separate basis for dismissal of certain individual Chapter 7 cases. This provision applies to an individual debtor whose debts are primarily consumer debts. Under §707(b)(1), after notice and a hearing, the court may dismiss a Chapter 7 case, or, with the debtor’s consent, convert the case to Chapter 11 or Chapter 13, if it finds that granting relief would constitute an abuse of the provisions of Chapter 7.
The purpose of §707(b) is to prevent individuals who have sufficient ability to repay a meaningful portion of their debts from obtaining Chapter 7 liquidation relief when doing so would constitute an abuse of the bankruptcy system. The provision is therefore closely connected with the means test, although the means test is not the exclusive method by which abuse may be established.
Presumption of Abuse
Under §707(b)(2), the Bankruptcy Code establishes a statutory formula for determining whether a presumption of abuse arises. This is commonly referred to as the means test. The calculation generally compares the debtor’s current monthly income with specified expenses and deductions permitted by the statute. The resulting figure is then applied to the debtor’s applicable unsecured debts in accordance with the statutory formula.
If the requirements of §707(b)(2) are satisfied, a presumption of abuse arises. The existence of the presumption does not necessarily mean that the debtor’s case is immediately dismissed. Rather, it provides a statutory basis for seeking dismissal or other appropriate relief, subject to the procedures and requirements of the Bankruptcy Code.
Abuse Without a Presumption
Failure to trigger the presumption under §707(b)(2) does not necessarily mean that the debtor is entitled to continue under Chapter 7 without further examination. Under §707(b)(3), the court may consider whether the case should nevertheless be dismissed because it was filed in bad faith or because the totality of the circumstances of the debtor’s financial situation demonstrates abuse.
This provision is important because the means test is a statutory screening mechanism rather than the sole measure of abusive conduct. The court may examine the debtor’s overall financial circumstances and the manner in which the bankruptcy case was filed. Consequently, a debtor who does not trigger the presumption of abuse under §707(b)(2) may nevertheless face dismissal under §707(b)(3) if the statutory standard for abuse is satisfied.
Role of the United States Trustee
The United States Trustee plays an important role in the administration of Chapter 7 cases and in identifying cases that may involve abuse. Section 707(b) contains provisions governing who may seek dismissal on the ground of abuse. Depending upon the circumstances and the applicable statutory requirements, a motion may be brought by the United States trustee, bankruptcy administrator, or another party in interest.
The United States Trustee may therefore review the debtor’s financial information and the circumstances of the filing to determine whether the case raises issues under §707(b). The debtor is entitled to notice and an opportunity to respond where dismissal is sought.
Conversion Instead of Dismissal
Section 707(b)(1) provides an alternative to dismissal in appropriate circumstances. Where granting Chapter 7 relief would constitute abuse, the court may, with the debtor’s consent, convert the case to Chapter 11 or Chapter 13 rather than dismissing it. Conversion allows the debtor, where eligible, to continue receiving bankruptcy protection under a reorganization chapter and repay creditors according to the applicable requirements of that chapter.
This distinction is important. Dismissal ends the bankruptcy case, whereas conversion changes the chapter under which the existing bankruptcy case proceeds. Thus, where the debtor is eligible and consents to conversion, conversion may provide an alternative to dismissal.
Notice and Hearing
Dismissal under §707 is not ordinarily an automatic administrative action. The applicable provisions require notice and a hearing before the court dismisses a case on the grounds specified in the statute. This gives the debtor and other interested parties an opportunity to contest the allegations supporting dismissal and present relevant evidence and legal arguments to the bankruptcy court.
The procedural requirements are particularly important where dismissal is sought for abuse under §707(b), because the debtor may dispute the means-test calculation, the characterization of debts as consumer or non-consumer debts, the existence of bad faith, or the contention that the totality of the circumstances demonstrates abuse.
Effect of Dismissal on the Debtor
The most significant consequence of dismissal is that the debtor generally does not receive the Chapter 7 discharge that would otherwise provide the fresh-start protection associated with a completed Chapter 7 case. The distinction can be expressed simply: dismissal terminates the bankruptcy case, whereas discharge eliminates personal liability for qualifying debts.
After dismissal, creditors may generally resume or pursue collection activity that was stayed by the bankruptcy filing, subject to any other applicable legal restrictions and the terms of the dismissal order. The trustee’s administration of the bankruptcy estate also generally comes to an end, although the precise treatment of estate property and other matters may depend upon the circumstances and the court’s order.
Effect on the Automatic Stay
Dismissal also has consequences for the automatic stay under §362. Because the automatic stay is a consequence of the commencement of the bankruptcy case, termination of the case generally results in termination of the stay, subject to the applicable provisions of the Bankruptcy Code and any order entered by the bankruptcy court. Once the stay terminates, creditors may generally resume actions that had been stayed, unless another legal basis prevents them from doing so.
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Mukesh Suman is a lawyer based at Delhi. He also provides bankruptcy paralegal services to clients based in USA. He may be contacted at mukesh_suman@outlook.com.
