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Can a bankruptcy case be converted from one Chapter to another?

You may have heard of cases in which a bankruptcy filed under one Chapter of the federal bankruptcy code is transferred to another chapter. In a business bankruptcy, although the business may have initially filed under a specific bankruptcy Chapter, the court administrator, trustee, or the petitioner has the option of filing a motion to covert to another one.

One may do this in Texas or elsewhere because it may be in the best interest of the filer, as well as the creditors in certain situations. An example of this is the recent bankruptcy of Linwood Furniture LLC, a furniture manufacturer based in North Carolina. The court administrator recently filed a motion to convert the Chapter 11 case to Chapter 7.

The court administrator says that the conversion is in the best interest of the creditors and Linwood, since the company will not be able to continue conducting business and is not currently in operation. The administrator says that the business cannot be allowed to continue losing money, which would eventually leave nothing in the estate to pay back creditors. He also claimed that the company's failure to provide required financial data, as well as unpaid Chapter 11 fees were also part of the reason for the conversion.

The bankruptcy filing provided a glimpse into the downfall of the business. The company had lost money most months. In May, the business lost $55,701, which included $538,071 of income and expenses totaling $593,772. The company also reported $6.89 million in debt, which is approximately double its assets, which were listed as $3.65 million. The company also claimed that it predicts it will run out of money necessary to continue operating shortly, forcing it to close its doors without a new owner or additional funds.

A Chapter 7 bankruptcy filing appears to be preferable in this case because it would liquidate all of the company's remaining assets. However, in a Chapter 11 case in Texas or elsewhere, the assets would not be liquidated. Rather, debt would be restructured and the company would be able to continue operating, though this would not be practical in this particular instance. Nevertheless, a Chapter 7 proceeding will allow the company to close its doors while under the protection of the bankruptcy court, thus paving the way for the principals to move on to other business ventures.

Source: Winston-Salem Journal, "Motion filed to convert Linwood Furniture to Chapter 7 bankruptcy case," Richard Craver, Aug. 10, 2012

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