If a chapter 7 case is converted to chapter 13 after the debtor receives a discharge, creditors with discharged claims are entitled to the allowance of their claims in chapter 13, according to Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., who took sides on an issue where the courts are split.
Judge Grandy is not announcing the end of so-called chapter 20 cases. In chapter 20, the debtor will have received a discharge in chapter 7 but will file an entirely new chapter 13 petition, not convert the chapter 7 case to chapter 13. In her court, the debtor was attempting a strategy that required conversion to chapter 13, not filing an entirely new petition.
After the debtor received his chapter 7 discharge, the trustee discovered an annuity that might be an asset. Rather than turn over the asset, the debtor converted his case to chapter 13.
The court served a notice of the chapter 13 bar date. A creditor who had not filed a claim in chapter 7 did file a claim for about $1,300 in the chapter 13 case. The debtor objected to allowance of the claim, contending that the debt had been discharged in chapter 7.
Judge Grandy disagreed in her August 7 opinion. She admitted that the Bankruptcy Code “offers little guidance as to what happens if the debtor seeks to convert their case after receiving a Chapter 7 discharge.”
Judge Grandy began by quoting Section 524(a)(2) which provides that a discharge “operates as an injunction against . . . any act, to collect . . . any such debt as a personal liability of the debtor.” In other words, she said that a “discharge eliminates a debtor’s personal liability for a debt, [but] it does not extinguish the liability of the bankruptcy estate.” [Emphasis in original.]
On the other side of the fence, Judge Grandy said “there is a line of cases which have held or at least assumed that upon conversion after a discharge, any dischargeable debts scheduled in the Chapter 7 case are effectively eliminated and not entitled to distributions under the Chapter 13 plan.”
Judge Grandy gave several examples for how the debtor’s theory would break down in practical application. For example, no debts would remain for payment in chapter 13. Or, she said, “An unscrupulous debtor could conceal assets in the Chapter 7 in order to avoid liquidation and then convert to Chapter 13 in order to retain the asset to the detriment of creditors.”
Judge Grandy summarized the analysis like this: The bankruptcy estate was formed on the filing of the chapter 7 petition. Claims in existence became claims against the estate. On conversion, the filing date remained the same. So, prepetition claims in chapter 7 became claims in the chapter 13 case. Creditors with valid claims who filed timely claims in the chapter 13 case are entitled to receive distributions “despite the existence of the Chapter 7 discharge.”
Observation
Judge Grandy’s opinion does not undercut the theory for chapter 20 cases, where debtors can fully extinguish the personal obligation and underwater liens on a home mortgage. In chapter 20, the debtor files a new petition in chapter 13 (to extinguish the underwater lien) after receiving a chapter 7 discharge.
Judge Grandy’s opinion explains why a chapter 20 strategy would not work by converting to chapter 13 rather than filing a new petition.
If a chapter 7 case is converted to chapter 13 after the debtor receives a discharge, creditors with discharged claims are entitled to the allowance of their claims in chapter 13, according to Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., who took sides on an issue where the courts are split.
Judge Grandy is not announcing the end of so-called chapter 20 cases. In chapter 20, the debtor will have received a discharge in chapter 7 but will file an entirely new chapter 13 petition, not convert the chapter 7 case to chapter 13. In her court, the debtor was attempting a strategy that required conversion to chapter 13, not filing an entirely new petition.
After the debtor received his chapter 7 discharge, the trustee discovered an annuity that might be an asset. Rather than turn over the asset, the debtor converted his case to chapter 13.
The court served a notice of the chapter 13 bar date. A creditor who had not filed a claim in chapter 7 did file a claim for about $1,300 in the chapter 13 case. The debtor objected to allowance of the claim, contending that the debt had been discharged in chapter 7.