What is a “conversion to Chapter 7” in a Chapter 11 bankruptcy?

A “conversion to Chapter 7” in a Chapter 11 bankruptcy is a legal process whereby a debtor, who has filed for Chapter 11 protection, chooses to change the type of bankruptcy they are filing for. Specifically, a conversion enables the debtor to switch from filing under Chapter 11 to filing under Chapter 7, the latter of which is commonly referred to as liquidation. When converting to Chapter 7, the debtor must forfeit all property that they acquired while in Chapter 11, including assets such as real estate, business equipment, and vehicles. As a result, all assets that were acquired during the Chapter 11 filing become immediately available to the bankruptcy trustee to either liquidate, or pay off creditors, as specified in the Chapter 7 filing. Furthermore, the debtor can no longer continue the Chapter 11 case and instead must endure the lengthy Chapter 7 process, which normally lasts for up to four to six months. It is important to note that conversion to Chapter 7 is not always allowed and is decided at the discretion of the courts. The decision to convert or not can be based on numerous factors, such as the debtor’s ability to reorganize their finances, or the presence of a fundamental flaw in the original Chapter 11 filing. In some cases, the court may require the trustee to investigate the debtor’s finances and financial history before approving the conversion to Chapter 7.

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What is a “conversion to Chapter 7” in a Chapter 11 bankruptcy?

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