Dismissals & Conversions in Bankruptcy: Tips & Tricks to Success

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Dismissing or Converting a Bankruptcy Case

How to Dismiss or Convert a Chapter 7, Chapter 11, & Chapter 13 Bankruptcy

Filing for bankruptcy is an incredibly powerful tool to help alleviate debt that cannot be paid. When filing for bankruptcy, it is important that paperwork is filed honestly and in a timely manner, local and federal laws are followed, and any mandatory hearings have been attended. Following these rules can help avoid a bankruptcy dismissal, which closes a bankruptcy case before a discharge is ordered. A dismissal means that the debtor is still liable for debts and that the automatic stay is lost. A bankruptcy conversion, on the other hand, occurs when a court permits changing a bankruptcy case from one chapter to another chapter. To better understand bankruptcy dismissal and conversion, we highly recommend you contact an experienced bankruptcy attorney who can help you understand your rights.

Chapter 7 Bankruptcy

Chapter 7 Bankruptcy Dismissal

Chapter 7 Bankruptcy Dismissal or ConversionA chapter 7 bankruptcy case may be dismissed for a variety of reasons (review § 707 of the Bankruptcy Code for a complete list). Most commonly, the debtor does not actually qualify for a chapter 7 bankruptcy under the means test. The means test, as described in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), is a calculation to determine disposable income after all other income and expenses have been accounted for. The means test was developed to prevent abuse of chapter 7 bankruptcy by only making it available to debtors who truly need it. If the courts find that a debtor does not qualify for a chapter 7 bankruptcy, the case will be dismissed. Courts have established that petitions for chapter 7 bankruptcy that constitute a “substantial abuse” of provisions of that chapter warrant dismissal. See In re Motaharnia, 215 B.R. 63 (Bankr. C.D. Cal. 1997). Within the meaning of the “substantial abuse” dismissal provision is whether debtor has ability to repay his debts; and, in this case, the debtor’s ability to repay his debts within three years, without undue hardship to debtor or debtor’s dependents, is itself sufficient to warrant dismissal of bankruptcy case. Id. Indeed, courts have dismissed chapter 7 bankruptcy petitions on the grounds that the petitioner can pay off the debts quickly and without unnecessary hardship and, therefore, does not qualify for chapter 7 bankruptcy.

Conversion From Chapter 7 Bankruptcy to Chapter 11 Bankruptcy or Chapter 13 Bankruptcy

The United States Code allows for a conversion in a chapter 7 bankruptcy case under the following instructions:

(a) The debtor may convert a case under this chapter 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. Any waiver of the right to convert a case under this subsection is unenforceable.
(b) On request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time.
(c) The court may not convert a case under this chapter to a case under chapter 12 or 13 of this title unless the debtor requests or consents to such conversion.
(d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.

 11 U.S.C.A. § 706

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy Dismissal

Chapter 13 Bankruptcy Dismissal or ConversionIn a chapter 13 bankruptcy, § 1307 of the Bankruptcy Code provides information to debtors on how to dismiss their case. It “establish[es] a two-step analysis for dealing with questions of conversion and dismissal. First, it must be determined that there is ’cause’ to act. Second, once a determination of ’cause’ has been made, a choice must be made between conversion and dismissal based on the ‘best interests of the creditors and the estate.'” In re Nelson, 343 B.R. 671 (B.A.P. 9th Cir. 2006). The Ninth Circuit determined that, “[a]lthough not specifically listed, bad faith is a ’cause’ for dismissal under § 1307(c).” In re Leavitt, 171 F.3d 1219, 1224 (9th Cir. 1999). Moreover, the court explained that a debtor who has filed a Chapter 13 petition in “bad faith,” such that case may be dismissed upon that basis, has unfairly manipulated the Bankruptcy Code and has otherwise filed the petition or plan in an inequitable manner. In re Henson, 289 B.R. 741 (Bankr. N.D. Cal. 2003).

Conversion From Chapter 13 Bankruptcy to Chapter 7 Bankruptcy

In some cases, debtors may want to convert from a chapter 13 bankruptcy to a chapter 7 bankruptcy. This may occur if the debtor can no longer pay the chapter 13 payments. In such a case, the United States Code provides that:

(a) The debtor may convert a case under this chapter to a case under chapter 7 of this title at any time. Any waiver of the right to convert under this subsection is unenforceable.
(b) On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.
(c) Except as provided in subsection (f) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including–
(1) unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees and charges required under chapter 123 of title 28;
(3) failure to file a plan timely under section 1321 of this title;
(4) failure to commence making timely payments under section 1326 of this title;
(5) denial of confirmation of a plan under section 1325 of this title and denial of a request made for additional time for filing another plan or a modification of a plan;
(6) material default by the debtor with respect to a term of a confirmed plan;
(7) revocation of the order of confirmation under section 1330 of this title, and denial of confirmation of a modified plan under section 1329 of this title;
(8) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan other than completion of payments under the plan;
(9) only on request of the United States trustee, failure of the debtor to file, within fifteen days, or such additional time as the court may allow, after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a);
(10) only on request of the United States trustee, failure to timely file the information required by paragraph (2) of section 521(a); or
(11) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.

11 U.S.C.A. § 1307

Chapter 11 Bankruptcy

Chapter 11 Bankruptcy Dismissal

The Ninth Circuit Bankruptcy Appellate Panel found that the “[b]ankruptcy court has broad discretion in determining what constitutes ’cause’ to convert or dismiss a Chapter 11 petition. Because good faith is required in the commencement and prosecution of a Chapter 11 case, the lack thereof constitutes ’cause’ for dismissal.” In re Sullivan, 522 B.R. 604 (B.A.P. 9th Cir. 2014).

Conversion from Chapter 11 Bankruptcy to Chapter 7 Bankruptcy

In a chapter 11 bankruptcy, the United States Code allows for a one-time conversion to a chapter 7 bankruptcy. However, there are certain restrictions to this right. The Code lists, in relevant part:

(a) The debtor may convert a case under this chapter to a case under chapter 7 of this title unless–
(1) the debtor is not a debtor in possession;
(2) the case originally was commenced as an involuntary case under this chapter; or
(3) the case was converted to a case under this chapter other than on the debtor’s request.
(b)(1) Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.
(2) The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor or any other party in interest establishes that–
(A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and
(B) the grounds for converting or dismissing the case include an act or omission of the debtor other than under paragraph (4)(A)–
(i) for which there exists a reasonable justification for the act or omission; and
(ii) that will be cured within a reasonable period of time fixed by the court.
(3) The court shall commence the hearing on a motion under this subsection not later than 30 days after filing of the motion, and shall decide the motion not later than 15 days after commencement of such hearing, unless the movant expressly consents to a continuance for a specific period of time or compelling circumstances prevent the court from meeting the time limits established by this paragraph.

11 U.S.C.A. § 1112

Dismissal With or Without Prejudice

Courts may dismiss a bankruptcy case with or without prejudice. Dismissing a case without prejudice is usually due to a failure to file all bankruptcy forms, pay court fees, or attend a creditors’ meeting. A case dismissed without prejudice may be refiled immediately once the appropriate corrections are made. If, however, the case is dismissed with prejudice, the debtor is restricted from filing for bankruptcy for a period of time and the automatic stay is lifted.

To clarify if and when a bankruptcy case may be dismissed, Rule 1017 of the Federal Rules of Bankruptcy Procedure states:

(a) Voluntary Dismissal; Dismissal for Want of Prosecution or Other Cause. Except as provided in §§707(a)(3), 707(b), 1208(b), and 1307(b) of the Code, and in Rule 1017(b), (c), and (e), a case shall not be dismissed on motion of the petitioner, for want of prosecution or other cause, or by consent of the parties, before a hearing on notice as provided in Rule 2002. For the purpose of the notice, the debtor shall file a list of creditors with their addresses within the time fixed by the court unless the list was previously filed. If the debtor fails to file the list, the court may order the debtor or another entity to prepare and file it.
(b) Dismissal for Failure To Pay Filing Fee.
(1) If any installment of the filing fee has not been paid, the court may, after a hearing on notice to the debtor and the trustee, dismiss the case.
(2) If the case is dismissed or closed without full payment of the filing fee, the installments collected shall be distributed in the same manner and proportions as if the filing fee had been paid in full.
(c) Dismissal of Voluntary Chapter 7 or Chapter 13 Case for Failure To Timely File List of Creditors, Schedules, and Statement of Financial Affairs. The court may dismiss a voluntary chapter 7 or chapter 13 case under §707(a)(3) or §1307(c)(9) after a hearing on notice served by the United States trustee on the debtor, the trustee, and any other entities as the court directs.
(d) Suspension. The court shall not dismiss a case or suspend proceedings under §305 before a hearing on notice as provided in Rule 2002(a).
(e) Dismissal of an Individual Debtor’s Chapter 7 Case, or Conversion to a Case Under Chapter 11 or 13, for Abuse. The court may dismiss or, with the debtor’s consent, convert an individual debtor’s case for abuse under §707(b) only on motion and after a hearing on notice to the debtor, the trustee, the United States trustee, and any other entity as the court directs.
(1) Except as otherwise provided in §704(b)(2), a motion to dismiss a case for abuse under §707(b) or (c) may be filed only within 60 days after the first date set for the meeting of creditors under §341(a), unless, on request filed before the time has expired, the court for cause extends the time for filing the motion to dismiss. The party filing the motion shall set forth in the motion all matters to be considered at the hearing. In addition, a motion to dismiss under §707(b)(1) and (3) shall state with particularity the circumstances alleged to constitute abuse.
(2) If the hearing is set on the court’s own motion, notice of the hearing shall be served on the debtor no later than 60 days after the first date set for the meeting of creditors under §341(a). The notice shall set forth all matters to be considered by the court at the hearing.
(f) Procedure for Dismissal, Conversion, or Suspension.
(1) Rule 9014 governs a proceeding to dismiss or suspend a case, or to convert a case to another chapter, except under §§706(a), 1112(a), 1208(a) or (b), or 1307(a) or (b).
(2) Conversion or dismissal under §§706(a), 1112(a), 1208(b), or 1307(b) shall be on motion filed and served as required by Rule 9013.
(3) A chapter 12 or chapter 13 case shall be converted without court order when the debtor files a notice of conversion under §§1208(a) or 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. The clerk shall promptly transmit a copy of the notice to the United States trustee.

Fed. R. Bankr. P. 1017.

Bad Faith Dismissal or Conversion Factors

Furthermore, the Ninth Circuit explained in In re Leavitt, 171 F.3d 1219, 1223–1224 (9th Cir. 1999) that: “The phrase ‘[u]nless the court, for cause, orders otherwise’ in Section 349(a) authorizes the bankruptcy court to dismiss the case with prejudice. A dismissal with prejudice bars further bankruptcy proceedings between the parties and is a complete adjudication of the issues.” Leavitt found that bad faith is “cause” for dismissal with prejudice. Courts have the “authority to order a bar to refile to sanction serial or bad faith filers by barring future filings for reasons and longer periods of time other than those specified by § 109(g) from either § 105(a), § 349(a), or both.” In re Lopez Llanos, 578 B.R. 700, 711 (Bankr. D.P.R. 2017). The bad faith factors in In re Leavitt are:

  1.  whether the debtor misrepresented facts in his petition or plan, unfairly
    manipulated the Bankruptcy Code, or otherwise filed his Chapter 13 petition or
    plan in an inequitable manner,
  2. the debtor’s history of filings and dismissals,
  3. whether the debtor only intended to defeat state court litigation, and
  4. whether egregious behavior is present.

Contact an Experienced Bankruptcy Attorney in Los Angeles, Orange County, San Diego, Riverside, Palm Springs, San Bernardino, & Silicon Valley

Whether you are thinking about converting your bankruptcy to a different chapter or you have questions about a bankruptcy dismissal, the lawyers at Talkov Law are here to help. Our attorneys have vast experience with bankruptcy matters, including chapter 7 bankruptcy, business bankruptcy, bankruptcy adversary proceedings, involuntary bankruptcy, and more. Call (844) 4-TALKOV (825568) or contact us online for a free, 15 minute consultation.

Talkov Law provides bankruptcy attorneys in Los Angeles, Orange County, San Diego, San Bernardino,  Riverside, Palm Springs, & Silicon Valley. Our bankruptcy lawyers provide expertise in Chapter 7, 11 and 13 on behalf of debtors, creditors, and interested parties. 

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