8: Conversion and Dismissal © Charles Tabb 2010 Where you start isn’t always where you finish

Problem 2.3(a) June 1: Debtor filed chapter 7 – owes debts of $25,000. – no nonexempt assets -> creditors will not be paid anything June 5: Debtor accidentally runs stop sign and crashes into Creditor’s Lamborghini, causing $55,000 in damages. Debtor’s insurance had lapsed a week earlier.

What Debtor wants -> Debtor files a motion to dismiss her chapter 7 Wants to refile her case in order to discharge her debt to Creditor.

Debtor’s problem Discharge only applies to PRE-bankruptcy debts (§ 727(b)) – “fresh start, not head start” $55,000 debt to Lamborghini owner arose POST-bankruptcy (June 5 is after June 1) If Debtor could just dismiss and refile, she’d discharge Lamborghini debt and still pay nothing

Debtor’s dismissal right? Debtor does NOT have an absolute dismissal right in chapter 7 Has to show cause just like anybody else, § 707(a) Judicial Test: no “legal prejudice”

Legal prejudice? Would it be legal prejudice to the owner of this car to get paid nothing? Of course DENY debtor’s dismissal motion – Basically, rule of thumb is: “if debtor wants it, it’s bad for her creditors, so deny” – Exs: Discharge debt; add exemption  NOPE

File another bankruptcy case? Ok, fine, so Debtor can’t dismiss this case. So why not just file a second bankruptcy case, and discharge the Lamborghini debt? Case 1: Not discharge Lamborghini debt Case 1: Not discharge Lamborghini debt Case 2: Discharge Lamborghini debt Case 2: Discharge Lamborghini debt

Case 2 discharge?? No discharge in 2 nd case for EIGHT years – See § 727(a)(8) Could do in FOUR years if file a chapter 13 case the 2 nd time around Case 2: Discharge Lamborghini debt Case 2: Discharge Lamborghini debt

Problem 2.3(b) Debtor filed chapter 7. She has debts of $25,000 She receives a monthly social security check of $750. Debtor decides she wants to try to repay some of her debts.  Does Debtor have an absolute right to convert to chapter 13?

Debtor convert 7 -> 13 DR YES, DR can convert 7 to § 706(a)

One time right As long as filed originally under chapter 7 – If was converted TO 7, then Debtor doesn’t have right to convert back to a reorg chapter

Debtor eligible in new chapter Debtor must be ELIGIBLE in new chapter, see 706(d) Here, is eligible in chapter 13: – Individual – Regular income (monthly social security check) – Under debt limits

Hold on Marrama for now For now, let’s hold off on Marrama’s “bad faith” exception to 706(a) That comes under the “judicial limitations” section Now we are just trying to figure out the statutory scheme

Problem 2.3(c) Same facts as in (b), except that Debtor is content to remain in chapter 7 Her trustee moves to convert her case to chapter 13 TEE

Answer to 2.3(c) NO The debtor’s case cannot be converted to Chapter 13 involuntarily. See § 706(c) This is consistent with the rule prohibiting involuntary chapter 13 cases. See § 303(a) – Otherwise could get an involuntary 13 through the back door of conversion