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  1. #1

    Default Converting a Chapter 13 Bankruptcy to Chapter 7, Three Years Into the Plan

    My question involves bankruptcy in the state of: Florida

    I filed for Chapter 13 protection 3 years ago but it took close to 1 year to get all the paperwork through the courts and get it approved. So I have been making payments for 2 years now. I had 1 asset I was trying to protect and that was roughly $50,000 in my savings account. Outside of that, 1 vehicle worth maybe $8,000 (now $4,000), no home or other major assets. I owed the IRS just over $21,000. My hope was that I would get back to work and be able to use my income to pay off the debt.

    At the time, I was not aware how any of this worked and trusted my attorney to get me through this with as little pain as possible, especially financial pain. I knew I would have to repay the taxes but it took my attorney 1 year to tell me that I would also have to fork over the taxes plus an amount equal to the $50,000 I was trying to save ($20 some thousand to the Trustee and close to $30,000 for ???) And because it took 1 year to tell me that, my savings account was actually down to roughly $40,000 at that time. He told me this 1 day before he went into court to have the entire package approved and essentially asked me ďwhat do you want me to do?". I was actually floored by this but after waiting 1 year and having less than 24 hours to decide, I told him I had no choice but to accept it. I was just hoping I could make it work somehow.

    I could write a book on why, but I have not worked in 4 years. Short story, my previous jobs required a security clearance so the bankruptcy ended that. I also had a large gap in my resume, my age, and probably a few other things working against me. Iíve looked outside my field but suspect I am viewed as over-qualified and likely to leave? Regardless of the reason, itís been 4 years since my last paycheck. My savings is below $10,000 now and I know that will run out in about 4 more months.

    So now I am considering changing the 13 over to 7. Thereís not much left in my savings and Iím probably going to use part of that as a cushion against being totally homeless when the **** hits the fan.

    Iíve been digging around in this site and some other venues, but I canít find how any of this would play out going from a 13 to a 7 with federal taxes only, and limited assets. Iím still a few months off from this happening but Iím trying to see if I can get some advice on the best way to handle this. When this all started 3 years ago, I knew I owed the IRS roughly $6,000 and had no problem with that. But during the Chapter 13 proceedings it ballooned to $20 some thousand and a balloon payment that would bring all my payments to the court to equal the $50,000 I had in my savings account. Had I known then what I know now, I would have taken a different approach, but it is what it is.

    Anyway, In a few months I will be broke (or close to it) with no job and very little hope. Hopefully someone can tell me how changing over to a chapter 7 will affect my monthly payments and total that I owe. The plan I am on now just is not going to work. Thanks!!

    BTW, I obviously have an attorney, but I do not entirely trust them and wanted to ask here first before I approach them about changing this. I feel like they just railroaded me into whatever was convenient for them before, not what would work in my best interests.

  2. #2

    Default Re: Converting a Chapter 13 Bankruptcy to Chapter 7, Three Years Into the Plan

    Hi Daniel. I am sorry that you are having some serious problems with your bankruptcy case. I'll give you my impressions, but please note that I am not giving legal advice and am only talking in generalities here and do not know how how the law in your specific jurisdiction might vary from the law in mine. (Yes bankruptcy law is federal, but the local courts, divisions, districts, and circuits tend to interpret things a bit differently from each other).

    First, if you are unhappy with your attorney, it is OK to seek out new counsel, though you may still owe fees to your prior attorney if they weren't already paid off. A lot of bankruptcy attorneys will provide free consultations. Further, sitting down and presenting your entire case to an attorney, in person, who can look it over in detail will give you the best opportunity to understand the options available and how they will affect you.

    Converting to a chapter 7 will have its own set of issues. You have to qualify for it just like you would have to qualify for it if you were filing new. This means passing the means test, which might be possible if you hadn't worked for the year before you filed.

    But the question is will chapter 7 be the right move? Generally it will only help unsecured debt (credit cards, medical bills, etc.). Once complete you would likely still owe the taxes.

    Further, chapter 7 is a liquidation chapter, meaning the idea is that the Trustee sells your stuff and pays your creditors off. In most chapter 7s the assets are of low enough value that they can be exempted (protected) so this typically isn't an issue. But the money that's in your savings account might exceed those exemptions and be unprotected; it depends on how Florida applies exemptions. Also, car creditors don't have to let you keep your car in a chapter 7, so you might be in danger of losing it as well.

    There may be a few options you hadn't considered. One is to possibly dismiss the case and then refile a new, fresh case. Be careful here because there are certain things that can bar you from refiling for a time, or you might not receive the protection of the automatic stay. You definitely want to speak with an attorney before going this route.

    Second, if you still end up with tax debt, you might consider seeking an offer in compromise with the IRS. It's a bit of a difficult process to go through, but can be extremely beneficial as it can be structured as settling the debt for a lower amount and paying it off over time. You can seek the advice of a tax attorney in doing it, or try to do it alone (I have a client who did one on his own before he came to see me about bankruptcy).

    But the bottom line is that you should probably sit down with an attorney, yours or seek new counsel, lay out the details of your case, and have them direct you on your best options.

    I wish you the best!

  3. #3
    Join Date
    Oct 2006
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    15,123

    Default Re: Converting a Chapter 13 Bankruptcy to Chapter 7, Three Years Into the Plan

    Quote Quoting DanielinFlorida
    View Post
    My question involves bankruptcy in the state of: Florida

    I filed for Chapter 13 protection 3 years ago but it took close to 1 year to get all the paperwork through the courts and get it approved. So I have been making payments for 2 years now. I had 1 asset I was trying to protect and that was roughly $50,000 in my savings account. Outside of that, 1 vehicle worth maybe $8,000 (now $4,000), no home or other major assets. I owed the IRS just over $21,000. My hope was that I would get back to work and be able to use my income to pay off the debt.

    At the time, I was not aware how any of this worked and trusted my attorney to get me through this with as little pain as possible, especially financial pain. I knew I would have to repay the taxes but it took my attorney 1 year to tell me that I would also have to fork over the taxes plus an amount equal to the $50,000 I was trying to save ($20 some thousand to the Trustee and close to $30,000 for ???) And because it took 1 year to tell me that, my savings account was actually down to roughly $40,000 at that time. He told me this 1 day before he went into court to have the entire package approved and essentially asked me “what do you want me to do?". I was actually floored by this but after waiting 1 year and having less than 24 hours to decide, I told him I had no choice but to accept it. I was just hoping I could make it work somehow.

    I could write a book on why, but I have not worked in 4 years. Short story, my previous jobs required a security clearance so the bankruptcy ended that. I also had a large gap in my resume, my age, and probably a few other things working against me. I’ve looked outside my field but suspect I am viewed as over-qualified and likely to leave? Regardless of the reason, it’s been 4 years since my last paycheck. My savings is below $10,000 now and I know that will run out in about 4 more months.

    So now I am considering changing the 13 over to 7. There’s not much left in my savings and I’m probably going to use part of that as a cushion against being totally homeless when the **** hits the fan.

    I’ve been digging around in this site and some other venues, but I can’t find how any of this would play out going from a 13 to a 7 with federal taxes only, and limited assets. I’m still a few months off from this happening but I’m trying to see if I can get some advice on the best way to handle this. When this all started 3 years ago, I knew I owed the IRS roughly $6,000 and had no problem with that. But during the Chapter 13 proceedings it ballooned to $20 some thousand and a balloon payment that would bring all my payments to the court to equal the $50,000 I had in my savings account. Had I known then what I know now, I would have taken a different approach, but it is what it is.

    Anyway, In a few months I will be broke (or close to it) with no job and very little hope. Hopefully someone can tell me how changing over to a chapter 7 will affect my monthly payments and total that I owe. The plan I am on now just is not going to work. Thanks!!

    BTW, I obviously have an attorney, but I do not entirely trust them and wanted to ask here first before I approach them about changing this. I feel like they just railroaded me into whatever was convenient for them before, not what would work in my best interests.
    What you are saying about your tax debt does not make any sense. A 6k tax debt cannot balloon into a 20k tax debt unless you actually had taxable income after that point that caused the additional tax. You stated that you have not worked in 4 years so unless you liquidated other assets that created taxable income, that simply cannot be correct. Did you clean out an IRA or a 401k that created the additional tax debt?

  4. #4

    Default Re: Converting a Chapter 13 Bankruptcy to Chapter 7, Three Years Into the Plan

    Carson, the attorney I used was actually quite knowledgeable as well as the entire staff, itís just that I was nothing more than a number and in some cases, they seemed to be presenting me with information one day that required a decision by the next. That happened twice. I had already waited 1 year for a decision and needed to get something finalized so I would know what my payment would be. My previous work required moving almost constantly and before I could feel comfortable getting a job, signing leases, etc., I wanted to know what all my bills would be. My salary for a regular job versus a clearance job was cut in half. I think I should at least talk to another attorney but I may stick with the one that handled my 13. I got the impression many of these bankruptcy attorneys run ĎBankruptcy Millsí and just churn out numbers.

    The attorney has been paid in full for previous services. I know if something else arises or I change something I could incur additional costs with them, but that is understandable. I paid cash for my vehicle so there are no liens. My biggest concern before was trying to protect the $50k I had in savings, hoping I would find work and continue to build savings and pay off the debt. That did not work out.

    But my biggest surprise in all of this was being presented at the very final stage with being told that in addition to the $20 some thousand I had to pay in taxes (somewhat understandable) that I would have a balloon payment that would bring the total amount I would have to pay up to the same amount of the $50,000 I had in savings. That was presented to me the day before the final hearing where my plan would be approved if I agreed to that. I had no knowledge that was coming and assume I would only have to pay the amount for the IRS. I had to wait 1 year to hear that. I mean, the whole idea was to protect the $50k so I could invest that, find a job and continue to grow my savings. I essentially had to pay the court $50 grand to save $50 grand. Had my plan to find a job and continue to grow my savings, maybe that would have worked for me. But since I have not found work, I now have to pay $50 grand for Ö well, Iím not sure.

    I agree they may allow me to refile or modify the existing agreement. There is no $50 grand to protect and as far as Iím concerned, even if I have to go chapter 7, it still would reduce my overall payment down to just the taxes. Iíll comment on the taxes in my response to IIworking below.

    Thanks for your comments.

    - - - Updated - - -

    IIworking, I had been in contact with the IRS (prior to my 13 filing) and the last amount they told me was either $5,600 or $6,500, I canít remember which one it was (but I have it written down). A few months later they file a lien and thatís what prompted me to file for 13 protection. The attorney initially told me it normally takes 5 to 6 months from filing until the trustee approves a deal. But mine kept dragging on and on. I was not a client; I was a number and I got the impression they would contact me for info at the very last minute when they were preparing for court. Just 1 day prior to a scheduled hearing, the attorney emails me a document outlining the IRS amounts. If I remember correctly I got the info at 4 or 5 PM and the hearing was the following morning. The amount was now over $20 thousand and the only breakdown was essentially Ďtaxes, interest and penaltiesí there was nothing saying how they arrived at the amounts, just the amounts. And the attorney was asking me what I wanted to doí. He told me if I disputed the amount the Trustee (now getting impatient) might shoot the whole thing down. I also for my own needs needed an agreement in place. I had been sitting on my hands for 1 year waiting to find out what my payment would be, so I told the attorney just get it over with and take it. Iím not sure if you have ever tried to fight the IRS, but they are a worthy opponent and rarely lose, even when they are wrong.

    Regarding your comments about other income or and an IRA, etc.; No IRAís or retirement plans. And there was no income after I filed (actually beginning 1 year prior to filing). Now maybe they came up with something else for other years somewhere, I have no idea, which is one of the problems. My breakdown was Ďtaxes, interest and penaltiesí. Yeah, it doesnít make any sense.

  5. #5
    Join Date
    Apr 2009
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    Somewhere near Canada
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    Default Re: Converting a Chapter 13 Bankruptcy to Chapter 7, Three Years Into the Plan

    This is just a little note about bankruptcy and the IRS.

    Going pro se, my husband had a no-asset Ch 7 and was able to have past due taxes discharged, and he obtained the RFTL during the same proceedings. Did IRS stomp their feet? Yeah, they kinda did. But with help from the tax advocacy folk , 3 months later everything was done and dealt with and an apology letter came along with it (yes, it's framed).

    IRS aren't monsters. You just need to know who to talk to, and - perhaps more importantly - when to talk to them.

  6. #6

    Default Re: Converting a Chapter 13 Bankruptcy to Chapter 7, Three Years Into the Plan

    Dogmatique, thanks for your comments. I actually told my attorney when all this started that I thought the IRS was decent to deal with. While they may have been pleasant, I never had a chance to review or dispute anything during the proceedings (I was not given the time). I regret not doing that now but hindsight is always 20/20. Like I said, after a few months into the Chapter 13, I felt like I was nothing more than a number in a system. They ran me through, ground me up, and spit me out the other end. Looking back on it, I think the attorney should have at least attempted to protect me when I questioned the amount the IRS threw out there.

    I have thought about all of this and know if I were in the exact same situation with the exact same circumstances and knowledge, I would probably make the exact same decision I did before. At the time, it represented the best way out. It just didn’t work out the way I hoped it would.

    I still don’t understand how the bankruptcy law can be written to say if you are trying to protect assets worth $50,000 or $100,000 that you eventually have to pay the exact same amount. When I was going through the process there were a lot of people filing Chapter 13 to try to save their houses. So if they have a house with $100,000 in equity and they file Chapter 13, do they have to pay $100,000 to the courts as part of their payment plan? I don’t think that is the way it works (but I don’t know). It seems I got hammered because I had cash in the bank.

    I know I am going to have to try to have the amount I pay reduced to reflect only the amount owed in taxes, and I also would like the ability to review how they arrived at that amount they say I owe. I was told when I accepted the IRS amount shown than it was ’final’ and I would never again have the ability to dispute it. We’ll see how that goes I guess.

  7. #7
    Join Date
    Sep 2010
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    467

    Default Re: Converting a Chapter 13 Bankruptcy to Chapter 7, Three Years Into the Plan

    At first I was going to write a long post going through every problem I see for OP, however, much of what I was going to say has already been said.

    OP, in response to. . .

    I still donít understand how the bankruptcy law can be written to say if you are trying to protect assets worth $50,000 or $100,000 that you eventually have to pay the exact same amount. When I was going through the process there were a lot of people filing Chapter 13 to try to save their houses. So if they have a house with $100,000 in equity and they file Chapter 13, do they have to pay $100,000 to the courts as part of their payment plan? I donít think that is the way it works (but I donít know). It seems I got hammered because I had cash in the bank.
    You clearly do not understand. You had $50k just sitting in a bank. Instead of using that money to pay the taxes (be it $6k or $21k), you decided that holding all of the money was a better choice and elected to file Chapter 13.

    In a Chapter 13 you get to keep your NON-EXEMPT property if, and only if, you agree to pay the value of that NON-EXEMPT property to your creditors over the life of the Chapter 13 Plan. The fact that people going through a 13 with equity in their home got to keep the home is not relevant because, in Florida, ALL of the equity in a home is EXEMPT. You are mixing apples and oranges. The question is "what, if any, of the money sitting in the bank was exempt and what other NON EXEMPT property did you have?".

    You are living off the $$. Once that money is gone you will be "bankrupt" and converting may be the way to go. If you convert and obtain a discharge you will then have to work with the taxing agency to deal with the taxes you still owe.

    You really need to sit down with your current attny to discuss converting. If you have no faith in that attny find another one.

    Des.

  8. #8

    Default Re: Converting a Chapter 13 Bankruptcy to Chapter 7, Three Years Into the Plan

    despritfreya, you are right that I elected to try to protect the money I had in the bank with the hope I could cover the taxes some other way. What I was never told or understood until literally the last minute (this is 1 year after filing) is that I would eventually have to pay an amount equal to the $50k I was trying to protect. Had I known that in the beginning I probably would have taken a different approach. And as far as what would be exempt or non-exempt, that language may have been in some of the legal documents I received, but I had no idea how it would apply to my savings and that was never explained to me. Thatís why I hired an attorney; I have no legal background and didnít even know anyone who had gone through anything like this who could give me advice.

    Prior to filing I consulted with the attorney and asked what options I may have and specifically to protect the money I had in the bank. Chapter 13 was presented as my best option but there was no mention of having to pay back $50 grand until 1 year into this and right before my plan was to be submitted for final approval. So now I have the hindsight to look back and say yeah, there were better options available. Hindsight is always 20/20. People may want to criticize me for not knowing what would be exempt or not exempt, but the fact is I did not know and thatís why I went to an attorney to begin with. With the knowledge I have now, filing Chapter 13 would probably be the last option I would consider.

    The actual amount I previously owed on the taxes is probably 50% paid, based on the payments I have made to date. And thatís even if I am unable to dispute the amount the IRS said I owed, which according to the attorney, I would never be able to dispute again. I have 2 years of payments remaining followed by a balloon payment of roughly $20,000 and I have no idea how I can continue to meet the payments on my plan. I owed taxes and have no problem paying what I owed. But I think I do need to ask the court to reconsider my plan based on my current financial situation and employment prospects.

    As far as having faith in the attorney I used, I can tell you that the attorney and everyone at the firm that I dealt with were actually quite knowledgeable and competent. I think the biggest problem I faced then, and now, is that I was one of maybe 1,000 clients a month being run through their firm. I was shocked at the number of people filing for bankruptcy and now know that unless I am paying tens of thousands of dollars, I can never expect any type of individual attention. The law firm is quite competent and in the end, I can say I probably got what I paid for. I think it would be advisable to at least consult with another attorney, but in the end it may be better to stay with this firm. They already have all my paperwork and the only thing that has changed would be the amount of money in my savings account. Literally nothing else has changed as far as income, assets, means test, nothing.

    Thanks for your comment and advice.

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