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3rd Circuit Rules that When a Chapter 13 case Converts Undistributed Funds Should be Refunded to the Debtor

In re Michael, 2012 WL 5278411 (3rd Cir. 2012) (Ambro, J.)

What does the Bankruptcy Code require a Chapter 13 trustee to do with undistributed funds received pursuant to a confirmed Chapter 13 when the case is converted to Chapter 7? The District Court affirmed the Bankruptcy Court’s holding that the funds are to be returned to the debtor at the time of conversion.  The Third Circuit agreed and affirmed the District Court’s decision. There was over $9,100.00 at stake. The Court looked first to 11 U.S.C. §348(f), which provides that on conversion of a case from Chapter 13 to another Chapter, “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”  11 U.S.C. §348(f)(1)(A). (emphasis added).  In the case of a bad faith conversion, “the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.” Id.   The court reasoned that the language suggests that property of the Chapter 13 estate acquired post petition is excluded from the property of the new Chapter 7 estate.  The Court next reviewed section 1327(b) which vests all property of the Chapter 13 estate in the debtor on plan confirmation.  The court interpreted that provision that the monies held by the Chapter 13 trustee after plan confirmation is “under the control of the debtor as of the date of the conversion” for purposes of §348(f)(1).  The court concluded that the debtor still has a vested interest in the monies until the trustee makes distribution to creditors.

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Scott F. Waterman
110 West Front Street
Media, PA, 19063 USA
610-566-6177