The United States Supreme Court has issued a decision favoring debtors who convert Chapter 13 bankruptcy proceedings into Chapter 7 actions, holding that funds collected by a bankruptcy trustee pursuant to a debtor’s Chapter 13 plan belong to the debtor at the moment the debtor converts a case to a Chapter 7 proceeding.
The debtor, Charles Harris, filed for bankruptcy in 2010, seeking protection under Chapter 13 of the Bankruptcy Code. The bankruptcy plan established for Harris enabled him to keep his home and catch up on tardy mortgage payments over time. The “bargain” of a Chapter 13 plan, according to Scotusblog.com, is that a debtor gets to keep one’s assets, but current and future earnings must be used to pay creditors. Chapter 13 repayment plans typically last from three to five years.
In Harris’s case, $534 of his monthly wages would be used to pay creditors. His mortgage lender, Chase, would receive $352 per month, while other creditors split the remaining $182. After his payment plan started, Harris fell further behind on his mortgage payments, and Chase foreclosed.
Harris then converted his Chapter 13 bankruptcy to a Chapter 7 proceeding. The “bargain” of a Chapter 7 proceeding, unlike a Chapter 13 action, is that a debtor like Harris gets to keep all his earnings after the bankruptcy filing, but he must surrender all non-exempt assets to be used to pay creditors. Presumably since Harris lost his home to foreclosure, the Chapter 13 proceeding no longer made any sense to him.
Since Chase had foreclosed, Harris’s bankruptcy trustee stopped sending the mortgage payments she had been collecting, and at the time Harris converted his Chapter 13 proceeding into a Chapter 7 action, the trustee held some $4,300. The trustee, Mary Viegelahn, distributed this money to Harris’s creditors. Harris objected, arguing that the money was his.
The bankruptcy court sided with Harris, and a federal district court affirmed the bankruptcy court. The 5th Circuit United States Court of Appeals, however, reversed, holding that Viegelahn “was authorized to distribute the post-petition wages despite the conversion,” according to Jurist.org.
In a unanimous decision issued Monday, the United States Supreme Court reversed, siding with Harris and holding that funds held by a trustee at the time of a conversion from a Chapter 13 proceeding to a Chapter 7 proceeding must be refunded to the debtor. In its decision, the high court acknowledged that the Bankruptcy Code did not provide any clear answers to what happens to undistributed funds held by a trustee, collected to pay creditors pursuant to a Chapter 13 payment plan, when a debtor converts the proceeding to a Chapter 7 action.
The trustee argued that the creditors’ interest in the funds is vested at the time the “trust” is created. The trust is a legal term that refers to funds or property of the debtor collected and held by the trustee for the benefit of creditors. The Supreme Court rejected this argument, writing that no provision of the Bankruptcy Code classifies any property of a debtor as “belonging to creditors.”
If you find yourself needing the services of an experienced Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.
About the Author
Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.
Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.
In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.
“Neon sign, “CHANGE”” by Felix Burton – Flickr. Licensed under CC BY 2.0 via Wikimedia Commons –http://commons.wikimedia.org/wiki/File:Neon_sign,_%22CHANGE%22.jpg#/media/File:Neon_sign,_%22CHANGE%22.jpg
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