Conversion from 13 to 7: What if loss of assets?

An individual who starts a chapter 13 payment plan might not be able to complete the plan and might have to convert to chapter 7.  Consider the issue if the debtor had $10,000.00 in non-exempt funds when she filed the original chapter 13.  One year later the debtor converts to chapter 7.  The debtor no longer has the $10,000.00.  If the debtor had filed a chapter 7 at the beginning, the chapter 7 trustee would have been entitled to those funds.

So what happens now when upon conversion from  chapter 13 to 7 and the trustee demands the $10,000? A recent case addressed this issue. In re Ashley,  2013 Bankr Lexis 328 (Bankr M.D.  FL.  Jan. 28, 2013) held that debtors could in good faith have used the funds for purposes such as for ordinary and necessary living expenses.  If that is established, the debtor is only required to turnover upon conversion the non-exempt property the debtor held at that date,  relying on Section 348(f)(1)(A).

Ashley actually had an added twist.  The debtor did not list the asset when she filed the original chapter 13, but could have claimed the funds as exempt.  This created another good faith issue which had to be determined at an evidentiary hearing.

Any client in a chapter 13 fort lauderdale bankruptcy should consult with their attorney when evaluating the choice of converting from chapter 13 to 7.


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