5.5 Conversion and Dismissal of Cases

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

5.5 CONVERSION AND DISMISSAL OF CASES

5.501 In General. In certain circumstances, a court may, upon request by the debtor or a party in interest, or sua sponte, convert a bankruptcy case to a different chapter under the Bankruptcy Code or dismiss a case filed under any chapter.

5.502 Conversion and Dismissal by Chapter.

A. Chapter 7—Sections 706 and 707.

1. Conversion—Section 706. A debtor has a right to convert a Chapter 7 case to a Chapter 11, 12, or 13 case at any time if the case has not previously been converted to a Chapter 7 case under section 1112, 1208, or 1307. ¹⁵⁶ The bankruptcy court has no authority to deny the request for conversion, provided the debtor is eligible for the chapter chosen. ¹⁵⁷ A waiver of the debtor's one-time right to convert under section 706 is unen-forceable. ¹⁵⁸

The Bankruptcy Code also authorizes the court, at any time, after a request by a party in interest and after notice and a hearing, to convert a Chapter 7 case to Chapter 11. ¹⁵⁹ However, the court is not authorized to convert a case to Chapter 12 or 13 unless requested to do so by the debtor or unless the debtor consents to another party's request. ¹⁶⁰

Bankruptcy Rule 1017(f) governs the procedure for converting a case from Chapter 7 to other chapters. A motion to convert must be filed pursuant to Bankruptcy Rules 9013 and 9014. ¹⁶¹

2. Dismissal or Conversion—Section 707. Section 707 of the Bankruptcy Code authorizes the court, after notice and a hearing, to dismiss a Chapter 7 case for "cause" or to convert the case to Chapter 11, 12,

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or 13 with the debtor's consent. The Code has been amended to reduce the level of abuse necessary from "substantial abuse" to simple abuse and to remove the presumption that the debtor is entitled to the relief requested. The statute provides the following nonexhaustive list of factors that constitute "cause":

1.	Unreasonable delay by the debtor that is prejudicial to creditors;
2.	Nonpayment of any fees and charges required under section 123 of title 28 (filing and quarterly fees); and
3.	On a motion by the United States trustee for the failure of a debtor in a voluntary case to file, within 15 days or such additional time as the court may allow after the filing of the petition, its list of creditors, schedules, and statement of financial affairs. 162

Section 707(b) authorizes the court, sua sponte, or upon a motion by the United States trustee, a trustee, or any interested party, to dismiss or, with the debtor's consent, convert to a Chapter 11 or 13 case, a bankruptcy case filed by an individual debtor whose debts are primarily consumer debts, where it finds that granting a discharge will constitute an abuse of the provisions of Chapter 7. Dismissal or conversion pursuant to section 707(b) requires notice and a hearing. In making its determination, the court may not consider whether the debtor made or will make charitable contributions to a qualified religious organization. ¹⁶³

The changes to this section shift the focus away from the presumption that previously existed in favor of granting the debtor's requested relief and instead creates a mathematical formula that supports a finding of abuse. Abuse is presumed if the debtor's current monthly income, reduced by the amounts that are determined by clauses 707(b)(2)(A)(i), (ii), and (iii) multiplied by 60 is not less than the lesser of:

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• 25 percent of the debtor's nonpriority unsecured claims or $7,700, whichever is greater; or

• $12,850. ¹⁶⁴

B. Chapter 11—Section 1112 Conversion or Dismissal. On the request of a debtor, the court may convert a Chapter 11 case to a Chapter 7 case unless (i) the debtor is not a debtor-in-possession; (ii) the case originally was commenced as an involuntary case under Chapter 11; or (iii) the case was converted to a Chapter 11 case other than on the debtor's request. ¹⁶⁵

On the request of a party in interest, after notice and a hearing and absent unusual circumstances specifically identified by the court which establish that conversion or dismissal is not in the best interests of creditors and the estate, the court will convert a Chapter 11 case to Chapter 7 or dismiss a case under Chapter 11 for cause. ¹⁶⁶ Cause to convert includes:

1.	Substantial or continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
2.	Gross mismanagement of the estate;
3.	Failure to maintain appropriate insurance that poses a risk to the estate or to the public;
4.	Unauthorized use of cash collateral substantially harmful to one or more creditors;
5.	Failure to comply with an order of the court;
6.	Unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter;
7.	Failure to attend the meeting of creditors convened under section 341(a) or any examination under

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	Rule 2004 of the Federal Rules of Bankruptcy Procedure without good cause shown by the debtor;
8.	Failure to timely provide information or attend meetings reasonably requested by the United States trustee (or a bankruptcy administrator, if any);
9.	Failure to timely pay taxes owed after the date of the order for relief or to file tax returns due after the date of the order for relief;
10.	Failure to file a disclosure statement, or to file or confirm a plan within the time fixed by this title or by order of the court;
11.	Failure to pay any fees or charges required under chapter 123 of title 28 (filing and quarterly fees);
12.	Revocation of an order of confirmation under section 1144;
13.	Inability to effectuate substantial consummation of a confirmed plan;
14.	Material default by the debtor with respect to a confirmed plan;
15.	Termination of a confirmed plan by reason of the occurrence of a condition specified in the plan; and
16.	Failure of the debtor to pay any domestic support obligation that first becomes payable after the date of filing of the petition. 167

If the debtor or another party in interest objects to conversion, the objecting party must establish (i) that there is a reasonable likelihood that the plan will be confirmed within the time frames established by sections 1121(e) and 1129(e) or, if those sections do not apply, within a reasonable time; and (ii) that the grounds for granting such relief include an act or

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omission of the debtor other than the first cause factor above for which there was a reasonable justification and which will be cured within a time limit set by the court. ¹⁶⁸

Furthermore, the motion to convert or dismiss under section 1112 now must be heard not later than 30 days after the filing of the motion, and the court must decide the motion no later than 15 days after the commencement of the hearing unless the moving party agrees to a delay or "compelling circumstances prevent the court from meeting the time limits established." ¹⁶⁹

The court is also authorized, upon request of the United States trustee, to convert a Chapter 11 case to Chapter 7 or to dismiss the case, whichever is in the best interest of the creditors and the estate, if the debtor in a voluntary case fails to file its list of creditors, schedules, and statement of financial affairs within the time prescribed by the court. ¹⁷⁰

A court may convert a Chapter 11 case to either Chapter 12 or 13 only if (i) the debtor requests the conversion, (ii) the debtor has not been discharged under section 1141(d), and (iii) in a conversion to Chapter 12, the conversion is equitable. ¹⁷¹

A Chapter 11 case, like a Chapter 7 case pursuant to section 706(d), may...