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Bankruptcy case may impact Virginia debtors

According to an Illinois district court, money earned after an individual converted a Chapter 11 bankruptcy case to a Chapter 7 case is part of the bankruptcy estate. While one law professor believes that the ruling was wrong, the issue of what happens after a Chapter 11 case is converted to a Chapter 7 has never been heard at the circuit level. Lower courts had trouble answering the question as they were split in their rulings.

Chapter 11 bankruptcy is designed for businesses or individuals to reorganize their debt while Chapter 7 is a liquidation bankruptcy. Congress added language to the bankruptcy code that says any earnings made after a Chapter 13 case is converted to a Chapter 7 case are not part of the bankruptcy estate. In making its ruling, the court found significant the fact that Chapter 13 cases were mentioned but not Chapter 11 cases.

Therefore, the belief was that the exclusion was deliberate and did not apply to Chapter 11 cases. However, some believe that Congress intended to give similar treatment to Chapter 11 cases as was given explicitly to Chapter 13 cases and that the exclusion was the result of poorly drafted legislation. Otherwise, individuals may be worse off filing for Chapter 11 protection.

Those who are seeking relief from overwhelming debt may wonder how they will ever be able to get out from under. Those who have a regular source of income and who qualify for Chapter 13 might be able to reorganize their obligations under a court-approved plan. For others, a Chapter 7 liquidation bankruptcy may be an appropriate solution.

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