Conversion or Dismissal

A Chapter 11 case in New York starts with the filing of a petition with the bankruptcy court serving the area where the debtor lives. Each court has its own personality because the judges and trustees are different. Judge vacancies may create anxiety on court procedures and the number of cases on calendars with creditors, debtors, and attorneys not knowing what to expect.

When filing Chapter 11 bankruptcy, consider a law firm with offices in a court’s location to understand the politics of the judges, security guards, trustees, and opposing attorneys. An attorney who does not often appear in a jurisdiction may not be aware of the proper local forms to complete.

A New York debtor in Chapter 11 bankruptcy has a one-time right to convert the Chapter 11 bankruptcy to a Chapter 7 unless the:

• debtor is not a debtor-in-possession;
• Chapter 11 originally began as an involuntary; or
• case converts to a bankruptcy under Chapter 11 other than at the debtor’s request.

A New York debtor in a Chapter 11 does not have a right to dismiss a case upon request. To dismiss a case, there may be a status conference for the court to evaluate if the dismissal is in the best interest of the debtor. The judge cannot tell the debtor what to do, but may ask questions to make the debtor think twice.

The difference between dismissing a Chapter 11 case and converting to Chapter 7 is that when a debtor dismisses a case, the debtor loses the protection of the automatic stay. The creditors can go after the debtor for all of the debt owed. In a Chapter 7 conversion, the automatic stay is still in place until the Chapter 7 discharge. In a discharge, the debtor gets the benefit of getting rid of some old debt.

In a dismissal, the debtor may not get away without paying anything to the trustee or other parties who spent time on the case. The judge may allow dismissal when the debtor pays administrative fees for appraising properties, evaluating taxes. Sometimes a debtor may want to find out where all his money went by requesting forensic accounting. Unless there is fraud, the trustee usually does not do this because the accounting may exceed the assets in the bankruptcy estate.

When contemplating bankruptcy, engage a New York attorney well versed in each category of bankruptcy to advise on which Chapter to file on, and then to assist in conversion decisions.