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Bankruptcy cases added to US Supreme Court's docket, part 2

We interrupted our discussion of upcoming U.S. Supreme Court cases to talk about tax extenders that could prove especially helpful for people in the midst of or trying to avoid a financial meltdown. Now, we turn back to the Supreme Court's docket and some matters that could change the bankruptcy process.

As we said in our Dec. 29 post, two of the cases involve Chapter 13 bankruptcy. The first dealt with an unusual situation: a dispute over a "hybrid" repayment plan. The second deals with how the bankruptcy code handles certain aspects of a Chapter 13 conversion.

Generally, a debtor filing for personal bankruptcy will choose either Chapter 7 liquidation or Chapter 13 repayment. The first wipes out all qualifying debt. The second allows the debtor to pay off the qualifying debt in manageable monthly payments.

Things change, though. Say the debtor loses his job or suffers a serious injury. That Chapter 13 payment that was reasonable quickly becomes a burden. What does the debtor do?

There are a couple of options. The debtor can work with the court to modify the repayment plan, or she can convert her Chapter 13 bankruptcy to a Chapter 7 bankruptcy.

Remember, under Chapter 13, the debtor makes payments to the bankruptcy trustee, not directly to the debtors. The trustee distributes the funds to secured creditors first. When those are paid off, the trustee pays any unsecured creditors that have filed claims against the debtor.

In the case before the court, the debtor's mortgage lender was a secured creditor for payments in arrears. The debtor was still responsible for current monthly payments. The bankruptcy triggered an automatic stay against foreclosure, but the debtor began to miss his monthly mortgage payments. The stay was lifted, and the lender presumably foreclosed.

Months passed before the debtor converted his bankruptcy to Chapter 7. During that time, though, he had been keeping up with his payments to the trustee. The trustee, however, was no longer paying the mortgage lender -- the stay was gone, and the home foreclosed on. So, when the time came to liquidate, the trustee was holding a good deal of money in the debtor's estate.

But whose money was it? Should the debtor have been reimbursed, or should the funds have been distributed to the other creditors?

We'll look at the appellate decision in our next post.

Sources:

Jurist.org, "Supreme Court adds 4 cases to docket," Dec. 12, 2014

In re Harris, 757 F.3d 468 (5th Cir. 2014), via WestlawNext

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