California Court Discusses Factors Considered When Evaluating Whether to Convert a Chapter 7 Bankruptcy Case to Chapter 11

There are key differences between Chapter 7 and Chapter 11 bankruptcy, and which one is appropriate depends on a debtor’s unique circumstances. While debtors must pass a means test in order to pursue Chapter 7 bankruptcy, that does not mean that their decision to seek debt relief under that Chapter cannot be challenged by their creditors. Recently, a California ruling discussed what factors the courts consider when weighing whether to grant a creditor’s motion to convert a Chapter 7 bankruptcy to Chapter 11. If you have debts that you are unable to pay, you may be able to obtain relief through bankruptcy, and you should speak to a California bankruptcy lawyer about your options.

History of the Case

It is reported that the debtor, who is a professional hockey player, filed a Chapter 7 petition for bankruptcy. One of his creditors subsequently filed a motion to convert his Chapter 7 case to Chapter 11 and asked the court to appoint a Chapter 11 trustee. The court noted that the creditors’ chances of recovering on their claims would be greatly improved if the case was transferred to Chapter 11, explaining that in Chapter 11, any income the debtor earns after filing the petition belongs to the estate, while in Chapter 7, the debtor retains any such income. The court nonetheless denied the creditor’s motion. The creditor subsequently appealed.

Factors Considered When Evaluating Whether to Convert a Chapter 7 Case to Chapter 11

The trial court’s decision was upheld on appeal. The court explained that section 706(b) of the Bankruptcy Code allows a court to convert a Chapter 7 bankruptcy case to Chapter 11 upon the request of a creditor, even if the debtor does not consent to the conversion. The court noted, though, that Section 706(b) does not offer any guidance as to what a court should or should not consider when evaluating whether to grant such a request.

As such, courts have held that bankruptcy courts have ample discretion in exercising the power to convert a bankruptcy case from Chapter 7 to 11, as long as it is based on an assessment of what will be most beneficial for all parties in interest. In most cases, the courts will consider anything they deem relevant, which may include the debtor’s ability to pay their debts, whether a conversion would benefit the parties in interest, and whether there are immediate grounds for conversion. In the subject case, the court ultimately determined that the bankruptcy court did not abuse its discretion in denying the creditor’s motion.

Meet with a Trusted California Bankruptcy Attorney

It is not uncommon for a creditor to attempt to convert a Chapter 7 bankruptcy case to Chapter 11, but such efforts will only be granted in certain circumstances. If you want to learn more about what relief filing for bankruptcy can offer, you should meet with an attorney as soon as possible. Matthew D. Roy is a trusted California bankruptcy lawyer who can advise you of your rights and help you to take the steps necessary to gain control of your debt. You can contact Mr. Roy through the form online or by calling (916) 361-6028 to set up a meeting.