(To which I respond – Congress doesn’t think these things out. It boggles my mind that we continue to endow Congress with an intelligence and thoughtfulness that it simply does not have. And as we continue to elect officials who campaign on being the “common man” and bash the “ivy elites” the problem of poorly-written laws will continue to get worse.)
Last week, the U.S. Supreme Court handed down a decision in Harris v. Viegelahn.
Question: Whether funds held by the Trustee at the time of conversion from Chapter 13 to Chapter 7 were to be returned to the Debtor or, alternatively, distributed to creditors.
Held: Funds go back to the Debtor.
By convention, most trustees make disbursements on a monthly basis. As a result, between the time the Trustee receives payments from the Debtor and when the Trustee makes disbursements to creditors, there are funds held by the Trustee.
In this particular case, the majority of funds were to go to Chase Bank to cure arrears on a defaulted mortgage. At some point in the Plan, the debtor defaulted again with Chase Bank, which sought and was awarded relief from stay to proceed with foreclosure. Under the terms of the Plan (and statutory law), funds received after secured claims were satisfied were then to go to unsecured creditors. Rather than immediately pay unsecured creditors, the Trustee held funds for a few months while the Debtor attempted a loan modification with Chase outside of the bankruptcy process. That loan modification ultimately failed and the Debtor then converted his case to Chapter 7, as his purpose for filing Chapter 13 had been defeated. At the time of conversion, the Trustee had accumulated roughly three months’ worth of wages and subsequently made a disbursement to unsecured creditors.
Much of the debate centered around three questions: what was property of the bankruptcy estate in Chapter 13 vs property of the bankruptcy estate in Chapter 7, whether the Trustee had any continued duty to make disbursements upon conversion, and whether the right to the funds vested in the creditors upon receipt of funds.
The justices lamented the fact that the statutes provided no clear guidance. At one point, Justice Scalia wondered why Congress would “adopt a rule that depends so much on happenstance?” In other words, why should this question hinge on whether the Trustee makes disbursements at the end of each day or holds funds for several months?
Another point made was that the Chapter 13 Trustee’s duties do not terminate completely upon conversion. No one argued that the Chapter 13 Trustee ought to keep the money. No matter what – a check was going to have to be written – a duty of disbursement had to be fulfilled. The question was whose name goes on the check – the debtor or the creditors?
Ultimately the Court chose to have funds returned to the Debtor.
One thing that bothered me about oral arguments was the discussion re: Congress’ intent to encourage people to try Chapter 13 instead of Chapter 7, and that if they adopted a rule that funds are to be distributed to creditors, that such an action would “punish debtors” and make them more likely to proceed under Chapter 7 initially.
This argument is specious and it only fosters a commonly held misconception that Chapter 13 is something that needs to be incentivized, because it’s not as good for the Debtor. On the contrary – Chapter 13 confers benefits upon Debtors that Chapter 7 does not. For many people, Chapter 13 saves more money in the long run. Yes, there is a monthly payment to the Trustee in Chapter 13 whereas there is not a monthly payment to a Chapter 7 Trustee. However, even Chapter 7 Debtors may have monthly payments after they file bankruptcy – but instead of a Trustee, those payments are made to their mortgage lenders, auto lien holders, and student loan creditors (to name the most common post-filing payments). In Chapter 13, there are powers we have that may make those payments cheaper.
Is Chapter 13 better for everyone? Of course not.
But it’s better for more people than most people realize. Read here for more information.