The major difference between filing Chapter 7 and Chapter 13 bankruptcy is income. Lower income levels are eligible to file for Chapter 7 (which is also normally a simpler process) while higher incomes file Chapter 13. Sometimes the conversion from Chapter 13 to 7 may happen by the debtor and sometimes it is forced by the bankruptcy court, and this is known as a forced conversion. While federal bankruptcy laws do not vary from state to state, some of Hawaii’s state laws and exemptions are quite specific.
How to Qualify
There are eligibility requirements that must be met in order to convert from a Chapter 13 to a Chapter 7. In Hawaii, the bankruptcy case must not have been converted from a different chapter, and the main eligibility requirement is the means test. This means that the court looks at income and expenses, then determines whether or not you can pay some of the debts through the Chapter 13 plan. If this is possible, then the debtor is not eligible for Chapter 7. Unless the court contacts the debtor, then a hearing for the case is not required.
Exceptions to the Means Test
Though there are only a few, some exceptions do apply for the means test when trying to convert to Chapter 7 bankruptcy. If the debt is primarily business debts, the debtor does not have to pass the means test. Additionally, sometimes having large amounts of student loan debt will aid in qualifying for Chapter 7 bankruptcy.
In Hawaii, the debtor may use either Hawaii state exemptions or federal bankruptcy exemptions. The exemptions may not be mixed and matched from each list, but if the debtor chooses to use state exemptions such as The Homestead Exemption or Motor Vehicle Exemption, there are a few federal ones that they may use as well.
Other Factors on the Means Test
Debtors will need to calculate their currently monthly income, compare their income to the state median income, calculate their household size, and determine what counts as income. Expenses and deductions will also need to be calculated, and this consists of a few things including a marital adjustment deduction, mortgage, and car ownership with operating expenses. When filing for bankruptcy in Hawaii, if the debtor’s income is less than the median income for the state, then the debtor is eligible to file for Chapter 7.
If the debtor’s income is higher than the median income, they may still file to convert to Chapter 7 but in order to find out will need to provide very detailed information about their expenses and payments on secured debts. If the debtor’s financial situation has changed since the time that they originally filed for Chapter 13 bankruptcy, they may be eligible to pass the means test with a recent change of financial circumstances.
Apart from finding an approved debt and credit counselor in Hawaii, the debtor will need to know about the laws and exemptions that are specific to the state in order to not only know if they are eligible to convert from Chapter 13 to Chapter 7 by utilizing the means test, but also to know if they qualify for any of the exemptions. It should be noted that bankruptcy cases that have been previously converted may not be eligible for a second conversion.
Debtors need to familiarize themselves with the state and federal bankruptcy laws and show that they are serious about gaining education and counseling for debt management. In order to even qualify, debtors must show that they have received this counseling from an agency that is approved by the U.S. Trustee in Hawaii six month prior to filing, as well as taking an education course on debt. Exceptions to this do exist but they are very few.