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A Debtor's Right to Convert: Absolute or Discretionary?
Published: 2008 | Author: William J. Tucker

This paper discusses whether a debtor's right to convert his bankruptcy case to a different code section is absolute or discretionary.  

 

Traditionally, the right of a debtor to convert under § 706(a) from a Chapter 7 case to Chapter 11, 12 or 13 was absolute.  However, a new line of cases is challenging this despite the language of § 706(a).  The traditional line of cases takes the plain language approach to interpreting the statute, and would find that a court could not prohibit debtor’s right to convert from a Chapter 7 case under § 706(a).  In re Kilker, 155 B.R. (Bankr.W.D. Ark. 1993).  There is a policy consideration for allowing an absolute right to convert – if a debtor wishes to repay her debts, the courts should never prevent her from doing so.  

 

However, there is recent case law which interprets conversion under § 706(a) as being discretionary by the court, instead of applying the code section as an absolute right of the debtor.  If the court determines that the debtor exercised her right under § 706(a) in bad faith, the court can disallow the conversion.  See In re Johnson, 262 B.R. 75 (Bankr.E.D. Ark. 2001).  The test for bad faith is based on an analysis of the totality of circumstances.  In re Wampler, 302 B.R. 601.  Several courts have applied this test, and the court in Kuhn furthered the standard by requiring either “extraordinary circumstances in which conversion is sought in bad faith,” or totality of the circumstances on the date of filing the motion for conversion which give rise to “significant potential prejudice to creditors regardless of any consideration of bad faith.”  In re Kuhn, 322 B.R. 377, 398 (Bankr. N.D. Ind.2005).  The Kuhn case is demonstrative of the willingness of courts to continue the trend of construing § 706(a) as a non-absolute right to convert, and courts’ willingness to expand the trend by giving the courts greater discretion to deny a debtor’s right to convert.



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