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Convert a Chapter 13 to a Chapter 7

A chapter 13 client (currently in a payment plan with a confirmed case) has had a significant revenue loss due to the virus. They told me they wanted to apply for a SBA loan under the CARES act.

However, in reading through the application guidelines, these loans will NOT be granted to people that are in an active bankruptcy. Also, the trustee would need to approve such a loan. A person that is in a Chapter 13 bankruptcy can voluntarily withdraw from the bankruptcy at any time.

If my client was to do this, then technically they COULD apply for the loan. However, a voluntary withdraw from the bankruptcy would remove the shield (automatic stay of protection) that the client currently has in place. Also, loans are CREDIT based, so the debt that exists could be a reason to deny the loan. Also, the SBA underwriter would see there was a recent bankruptcy and might anticipate a future bankruptcy.

In thinking this through, because the client has lost income due to the virus, I have suggested that they CONVERT chapter 13 over to a chapter 7. This will eliminate their chapter 13 plan payment immediately AND the unsecured creditor debt will be eliminated.

All things considered, it seems unlikely the debtor will be able to obtain the SBA loan they sought, so eliminating the significant debt (which they owe in the chapter 13 payment plan) seems to be the best solution under the circumstances.

If you know someone that is in a chapter 13, and they have had a loss of income, this might be a good time for them to convert to a chapter 7 bankruptcy and entirely eliminate their unsecured debt. Feel free to contact me with any questions regarding bankruptcy.



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