One of the most common conversions that occurs in bankruptcy is the conversion of Chapter 13 bankruptcy cases to Chapter 7 bankruptcy. But what happens to assets when the conversion takes place? Let’s take a look at what the bankruptcy code says:
(1) Except as provided in paragraph (2), when a case under chapter 13 of this title is converted to a case under another chapter under this title– (A) property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion;
What does this mean? Generally speaking, only the property that was part of the original Chapter 13 bankruptcy filing will become part of the new Chapter 7 bankruptcy case. But this does not include property that has paid for via Chapter 13 bankruptcy or property that simply does not exist because it was sold, was destroyed or donated. Also, the new Chapter 7 bankruptcy case will not include property that was acquired after the Chapter 13 bankruptcy case was filed. For example, if you were in Chapter 13 bankruptcy for 2 years and purchased a new car in that time, the new car would not become part of the new Chapter 7 bankruptcy case. However, there are some exceptions….
(2) If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.
An example of bad faith would be if the debtor received an inheritance that was large enough to repay his/her creditors in full but instead the debtor decided to file Chapter 7 bankruptcy. In this case the inheritance money would become part of the Chapter 7 bankruptcy case and would be used to repay creditors.