California Bankruptcy Lawyer Blog

Fremont Bankruptcy Lawyer Discusses U.S. Supreme Court Says Businessman Has Lost The Right To Convert From Chapter 7 To Chapter 13 Bankruptcy

The U.S. Supreme Court says that a Massachusetts man lost his right to convert from one bankruptcy chapter to another because he did not reveal all of his assets. In a 5-4 ruling in Marrama v. Citizens Bank of America, the Court reached its decision because Robert Marrama, who runs a flooring company, did not disclose that he had placed a Maine vacation house in a trust. Marrama had listed that the value of his interest in the property was zero. A bankruptcy trustee, who found out about the home, however, wanted to recover the real estate to help pay back Marrama’s creditors. Marrama then tried to change his bankruptcy case from Chapter 7 liquidation to Chapter 13, which lets a debtor pay their debts over a period of time will keeping their property.

Justice John Paul Stevens, in writing for the majority, stated that while honest debtors were entitled to convert their Chapter 7 cases to Chapter 13, a court is entitled to take away that right because of “fraudulent conduct.” Justice Samuel A. Alito, Jr. in his dissent, however, said that the U.S. bankruptcy code was unambiguous in its provision and that the debtor possesses a “broad right” to make the conversion to Chapter 13. Previous to the Supreme Court ruling, a bankruptcy judge had denied Marrama's request to convert to Chapter 13, with a bankruptcy appellate court supporting the ruling.

Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also called liquidation bankruptcy, allows a debtor to have his or her debts become liquidated. Essentially, a bankruptcy discharge under Chapter 7 frees the debtor from being personally liable for discharged debts while preventing creditors from collecting payments or taking other action against the debtor, such as eviction, foreclosure, or shutting down utilities. A court-appointed bankruptcy trustee then liquidates certain assets owned by the debtor.

In order to qualify for personal bankruptcy under the Chapter 7 bankruptcy code, a debtor must pass the means test- meaning that their current income must be less than or equal to the median in their state. If a debtor does not pass the means test, he or she may have to file under Chapter 13 bankruptcy instead.