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Bankruptcy cases added to US Supreme Court's docket, part 3

This is a continuation of our Jan. 10, 2015, post.

We are talking about a case on the U.S. Supreme Court's docket this year involving a Chapter 13 bankruptcy converted to a Chapter 7 bankruptcy. It is important to remember just how flexible the Chapter 13 bankruptcy is: If circumstances change, and the debtor cannot afford the monthly payments, he can ask the court to modify the plan. He can also convert to a Chapter 7 liquidation. It is always a good idea for the debtor to consult with his attorney before taking either step.

The debtor in this case converted his Chapter 13 after he had made monthly payments for a secured debt: back payments on his mortgage. The repayment plan payments were not a burden, but the debtor could not keep his mortgage current and once again fell behind. The lender foreclosed, but the debtor continued to make payments to the bankruptcy trustee, who decided to hold onto the funds designated for the lender.

By the time the conversion was complete, the trustee had about $5,500 set aside. The trustee distributed those funds to unsecured creditors under the Chapter 13 plan and paid herself a small commission. With that, the Chapter 13 was closed.

Did the trustee have the authority to do that? The debtor didn't think so. He sued to get the money back. The bankruptcy court and, subsequently, the district court agreed with the debtor. The trustee appealed, and this time she prevailed.

The appellate court -- the 5th U.S. Circuit Court of Appeals -- framed the question a little differently. The court looked at whether any undistributed funds from the Chapter 13 plan should qualify as assets when the plan coverts to Chapter 7. Other courts had tried to answer that question, but with mixed results.

We will wrap this up in our next post.

Source: In re Harris, 757 F.3d 468 (5th Cir.) cert. granted sub nom. Harris v. Viegelahn, 135 S. Ct. 782 (2014) via WestlawNext

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