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Issue converting to a Chapter 7 bankruptcy

People in South Carolina who file for Chapter 11 bankruptcy and then convert it to Chapter 7 may face having to turn earnings over to the trustee based on a March 2016 ruling in a district court. The district court, which is located in Illinois, heard the case of a man who was unable to reorganize his debts and thus converted from a Chapter 11 to a Chapter 7. One of his creditors and the Chapter 7 trustee said the man had to turn his earnings from his debtor in possession account over to the trustee.

The man said that because he received the earnings after his original filing, they did not count as part of the estate. After the bankruptcy court sided with the creditor, the man filed an appeal but the decision was affirmed. However, at least one law professor says the district court was wrong to uphold the ruling of the bankruptcy court.

The case is a complex one, but the court based its rulings on a 2005 addition to the Bankruptcy Code that states that when a case is converted from a Chapter 13 to a Chapter 7, a debtor's earnings after filing are not considered part of the bankruptcy estate. The district court ruled that the fact that Chapter 11 and 12 bankruptcies were not mentioned meant they were excluded. The law professor feels it was an oversight that the issue was not clarified in 2005.

Filing for bankruptcy can be a complex process even if a person does not convert from one type to another, and it can be easy to make small errors that snowball along the way. An attorney might be able to assist in putting together documentation and making sure that information is correct and filed in a timely manner.

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