Bankruptcy Conversion
Bankruptcy Conversion is the process of changing an existing bankruptcy case from one chapter of the Bankruptcy Code to another chapter when the Code permits conversion.
How it works
Conversion changes the chapter governing the case without ordinarily creating a new Petition Date. Section 348 provides that conversion constitutes an Order for Relief under the new chapter while generally preserving the original filing date and commencement date. In Chapter 11, Section 1112 governs conversion to Chapter 7, including the debtor’s limited conversion right and conversion for cause.
Conversion changes chapters, not the historical filing date
Section 348(a) generally preserves the date of the original petition, commencement and Order for Relief while creating an Order for Relief under the new chapter.
Chapter 11 can convert to Chapter 7
Section 1112 provides debtor and creditor pathways for conversion, subject to statutory limits, cause standards and the interests of creditors and the estate.
Governance changes can be immediate
Conversion from Chapter 11 to Chapter 7 generally ends the Debtor in Possession model and shifts administration to a Chapter 7 trustee.
Claims arising before conversion can receive special treatment
Section 348 contains detailed rules for claims and obligations arising after the original Order for Relief but before conversion.
Worked example: failed reorganization becomes liquidation
A debtor spends six months in Chapter 11, sells no major assets and cannot finance a plan. Conversion to Chapter 7 changes the case objective from reorganization to liquidation without resetting the original petition chronology.
Conversion is different from dismissal
Conversion keeps the bankruptcy case alive under a different chapter. Dismissal ordinarily ends the bankruptcy case and can restore prebankruptcy rights under Section 349.
Common mistakes
Treating conversion as a new case filing; assuming every Chapter 11 debtor has an unlimited conversion right; and confusing conversion with dismissal or plan liquidation.
Example
A company files Chapter 11 hoping to reorganize but later determines no viable plan exists. The court converts the case to Chapter 7. The case continues under the liquidation chapter, a Chapter 7 trustee is appointed, and the original Petition Date generally remains the reference filing date.
Example
A company files Chapter 11 hoping to reorganize but later determines no viable plan exists. The court converts the case to Chapter 7. The case continues under the liquidation chapter, a Chapter 7 trustee is appointed, and the original Petition Date generally remains the reference filing date.
Professional note
Conversion changes governance, statutory duties and often recovery expectations. It should not be modeled as though the debtor simply filed a fresh case on the conversion date.
Related terms
- Debtor in Possession
A Debtor in Possession, or DIP, is a Chapter 11 debtor that remains in possession and control of its business and bankruptcy estate while exercising most rights, powers and duties of a Chapter 11 trustee, subject to the Bankruptcy Code and court oversight.
- Chapter 11 Trustee
A Chapter 11 Trustee is a disinterested person appointed to replace the Debtor in Possession and administer the Chapter 11 estate when the court orders trustee appointment under Bankruptcy Code Section 1104.
- Order for Relief
An Order for Relief is the Bankruptcy Code event that places a debtor under the operative relief of a particular bankruptcy chapter, occurring automatically upon a voluntary filing and by court order in a qualifying involuntary case.
- Petition Date
The Petition Date is bankruptcy shorthand for the date a bankruptcy petition is filed and the case is commenced, creating a central reference point for estate property, the Automatic Stay, avoidance periods and prepetition versus postpetition rights.
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