Bankruptcy Conversion: is it Right for You?

This fall, Tennessee hospitality group 315 Union Holdings LLC filed for Chapter 11 bankruptcy. Currently, its Chapter 11 trustee is hoping to convert the Chapter 11 bankruptcy to a Chapter 7 bankruptcy, or liquidation, since the former hotel owner has no assets left to pay its debts. When the company sold its largest asset in September, it had little more than $13 million in assets, but over $25 million in liabilities. This case highlights conversion as one of the tools debtors may use to alleviate the burden of their debt.

What is Bankruptcy Conversion?

Bankruptcy conversion is an important tool for those who feel their current bankruptcy chapter filing is inappropriate, considering their current fiscal situation. For example, someone who has filed for Chapter 13 bankruptcy, known as a wage earner's plan, may wish to convert their bankruptcy to Chapter 7 if he or she can no longer make the payments required under Chapter 13.

How would a Chapter 11 to Chapter 7 Conversion Work?

Businesses like 315 Union Holdings which have filed for Chapter 11 bankruptcy have a one-time right to convert to Chapter 7 bankruptcy if the initial filing for Chapter 11 was involuntary or the result of a conversion that was not at the debtor's request. A person of interest in the bankruptcy, such as a creditor or bankruptcy trustee, may also petition to convert from Chapter 11 to 7 if the company:

  • continues to lose money
  • is unable to maintain appropriate insurance to continue operating, or
  • if there is a continual financial loss to the estate

Additionally, a conversion may be requested by a creditor if the debtor is using cash for collateral in a way that harms the creditor.

Can Individuals Apply for a Bankruptcy Conversion?

Yes. Debtors under Chapter 13 bankruptcy can convert to Chapter 7 if they can no longer make payments to creditors or are unable to pay child support, alimony or taxes. On the other hand, people who have filed for Chapter 7 bankruptcy can convert to Chapter 13, 11 or 12 bankruptcy if they meet the requirements for the desired chapter. However, an individual cannot convert from Chapter 7 to another chapter if he or she had previously converted from another chapter into Chapter 7.

A bankruptcy conversion can help those struggling to fulfill the payment requirements under an alternative chapter find relief from their debts. Before someone attempts such a change, however, it is recommended that he or she seek the advice of an experienced bankruptcy attorney who can thoroughly explain the bankruptcy conversion process.