We are wrapping up our discussion of a case from the 5th U.S. Circuit Court of Appeals that is now on the Supreme Court’s docket. The case is about a debtor who filed for Chapter 13 bankruptcy and later converted that bankruptcy to a Chapter 7 liquidation. The bankruptcy trustee had set aside about $5,500 of the debtor’s Chapter 13 payments that she then used to pay unsecured creditors from the Chapter 13 bankruptcy.

The debtor thought the money should go back to him. Both the bankruptcy court and the federal court decided in his favor. The trustee appealed.

The 5th Circuit 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.

Remember, Chapter 7 includes all of the debtor’s property at the time of the filing, with a handful of exceptions. Those exceptions vary from state-to-state, but most states include tangible personal property, primary residence, federal benefits, and a certain amount of cash.

The situation in this case has not been addressed by statute. Nor, the court said, is it addressed by case law. The 7th Circuit, which includes Illinois, had disagreed with the 3rd Circuit — the kind of split that the Supreme Court often resolves. Without any guidance from legislatures or courts, then, the court approached the question from a public policy and fairness perspective.

The court concluded that creditors may not have an absolute claim to the funds in that Chapter 13 account, but they had a better claim than the debtor had. The court reversed the lower courts — and, by doing so, created yet another split among the federal circuit courts of appeal.

It will be interesting to see what the Supreme Court does. We’ll follow it closely.

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