§ 122.2     Windfalls, Inheritances, Lotteries and the Like
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 122.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The vesting effect of confirmation under § 1327(b) has an interesting interaction with the expanded definition of property of the estate in a Chapter 13 case.1 Section 541 broadly defines property of the estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case.”2 In a Chapter 13 case, “in addition to the property specified in § 541,” property of the estate includes “all property of the kind specified in [§ 541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted . . . .”3 Property that a Chapter 13 debtor acquires after the petition becomes property of the estate by virtue of § 1306 notwithstanding that postpetition acquisitions would not become part of a Chapter 7 or Chapter 11 estate. It has been held that the Chapter 13 estate includes gifts, inheritances and windfalls that are acquired by the debtor after the petition.4

[2]

Section 1327(b) recites that, absent a contrary provision in the plan or in the order of confirmation, “the confirmation of a plan vests all of the property of the estate in the debtor.”5 The property that vests in the debtor at confirmation includes property captured by § 1306—all property of the kind described in § 541 that is acquired by the debtor after the filing of the petition. Ordinary statutory construction leads to the conclusion that a gift, inheritance, windfall or the like acquired by a Chapter 13 debtor after confirmation is vested in the debtor, not in the Chapter 13 estate unless the plan or confirmation order provides otherwise.6 Reading but one section further, § 1327(c) tells us that the property vesting in the debtor—including all property acquired after the petition—is “free and clear of any claim or interest of any creditor provided for by the plan.”7

[3]

This plain reading of the effect of confirmation on postpetition property produces outcomes that some courts find unpalatable. If postconfirmation gifts, windfalls, inheritances and other property vest in the debtor free and clear of prepetition claims, then creditors are stuck with their treatments under the plan and cannot require the Chapter 13 debtor to share postconfirmation riches. The courts have been quick to find theories to require Chapter 13 debtors to commit postpetition windfalls to funding the plan notwithstanding the plain language of § 1327.

[4]

As detailed elsewhere,8 some courts have creatively defined the vesting effect in § 1327(b) to leave room for the re-creation of the Chapter 13 estate after confirmation. Courts that continue the estate or that refill the estate with property acquired after confirmation would have less trouble reaching a postconfirmation acquisition for the benefit of creditors.9

[5]

The principal method of capture has been plan modification under § 1329.10 For example, it has been held that the Chapter 13 trustee has standing to seek modification of a confirmed plan to increase the dividend to unsecured claim holders when the debtor won a lottery11 and when the debtor received a large inheritance after confirmation.12 One court has described the entitlement of prepetition creditors to share in postpetition good fortune as an obligation of Chapter 13 debtors:

[W]hen a Chapter 13 debtor suddenly and unexpectedly inherits money or property prior to the completion of the plan, the new assets become property of the estate pursuant to Sections 541 and 1306 of the Bankruptcy Code. . . . The debtor is obligated to advise the trustee of the event and to file a supplemental schedule listing this asset. . . . The new assets, whether they are an increase in income, an inheritance or lottery winnings, normally are used to increase the monthly payments until there is full payment to the unsecured creditors or until the new assets are exhausted.13
[6]

These outcomes are driven more by policy considerations than by analysis of the Code. If the plan did not provide otherwise, the postconfirmation inheritance or lottery winnings would be property of the debtor, not property of the Chapter 13 estate. If postconfirmation property is not property of the Chapter 13 estate, then it would not be included in the best-interests-of-creditors calculation under § 1325(a)(4) at a hearing on modification of the plan to require the debtor to pay some or all of the windfall to creditors.14 If the Chapter 13 case were converted in good faith after the debtor received the windfall, general creditors in the Chapter 7 case would not necessarily be entitled to the postconfirmation largesse.15

[7]

The argument is made that a postconfirmation windfall is income to the debtor that increases the amount that must be committed to the plan to satisfy § 1325(b)16 at modification under § 1329. However, application of the disposable income test in § 1325(b) is complicated in this context.17 Typically it is the trustee moving to modify the plan after confirmation to capture the windfall for creditors. On the trustee’s motion, the objecting party will be the debtor. Disposable-income-test analysis is triggered by § 1325(b) only upon objection by “the trustee or the holder of an allowed unsecured claim.”18

[8]

If § 1325(b) does apply,19 how would the test work in this context? For example, if a Chapter 13 debtor inherited real property after confirmation, does that real property constitute disposable income for purposes of the test in § 1325(b)? If the bankruptcy court “projected” income at the time of confirmation under § 1325(b) and did not (obviously) include a windfall received by the debtor after confirmation, is it appropriate to apply the projected disposable income test a second time, upon a postconfirmation motion for modification of the plan?20 If all property vested in the debtor at confirmation under § 1327(b),21 does § 1325(b) reach the debtor’s postconfirmation acquisition?

[9]

To determine whether a debtor has regular income for eligibility purposes, several courts have concluded that money received by a debtor that is not property of the estate, because it is excluded by § 541 or is removable by exemption, is not regular income.22 Applying the same logic to postconfirmation income produces this difficult outcome: if neither the plan nor the order of confirmation preserved the estate, none of the debtor’s postconfirmation income is subject to disposable-income-test analysis at modification after confirmation. Could the plan be modified after confirmation to “re-create” the estate in order to capture postconfirmation income that would otherwise be property of the debtor? Because not every postconfirmation windfall will be subject to exemption, does the nonexempt portion “refill” the estate after confirmation?23 Or (more likely) are exemptions and property of the estate irrelevant to the question whether a postconfirmation windfall is acquired for creditors by § 1325(b)?24

[10]

At first blush, a rigid interpretation of § 1327 produces harsh outcomes for creditors when a Chapter 13 debtor gets lucky in the lottery or receives a substantial gift or inheritance after confirmation. On the other hand, Chapter 13 is supposed to provide a fresh start for individuals with debt problems. Confirmation binds the debtor and all creditors to the treatment of claims in the confirmed plan.25 Section 1327(b) complements the binding effect of confirmation by vesting in the debtor all property acquired during administration of the Chapter 13 case. Perhaps it is not unreasonable to ascribe to Congress the policy decision that Chapter 13 debtors would begin their fresh start with the right to possess and control all property not committed to funding the confirmed plan. Section 1327(b) is an obstacle if the goal is to require a Chapter 13 debtor to commit a postconfirmation windfall to paying creditors more than what is required by the confirmed plan.

[11]

There is support in the Bankruptcy Reform Act of 1994 for the position that property acquired by a Chapter 13 debtor after confirmation is not property of the estate and is not captured for the benefit of creditors unless the plan or order of confirmation provides otherwise. The 1994 Act amended § 348 of the Code to provide that when a Chapter 13 case is converted (in good faith) 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.”26 The legislative history says this 1994 amendment was intended to “clarify” a split in the case law in favor of the view that “the property of the estate in a converted case is the property the debtor had when the original chapter 13 petition was filed.”27 The legislative history further explains that the amendment was intended to prevent inclusion in the Chapter 7 estate of equity that accumulated in property owned by a Chapter 13 debtor before conversion.28

[12]

Property acquired by a Chapter 13 debtor by inheritance or windfall after confirmation typically was not property of the estate “as of the date of filing of the petition.”29 No prepetition creditor has any (reasonable) expectation of payment from such property, except possibly upon bad-faith conversion.30 It would be perverse for postconfirmation property to be appropriated for creditors in a performing Chapter 13 case but excluded from the Chapter 7 estate upon good-faith conversion. Congressional intent that Chapter 13 debtors not be penalized for attempting and failing at a Chapter 13 case is manifest in the 1994 amendments to § 348. It follows that a Chapter 13 debtor should not be penalized by good fortune while succeeding in a Chapter 13 case.

[13]

One bankruptcy court went to extraordinary lengths to excuse Chapter 13 debtors from sharing insurance proceeds with creditors. In In re Richardson,31 the debtors’ son died after confirmation, and the debtors became entitled to substantial insurance proceeds. The form Chapter 13 plan in the district contained a provision that overcame the vesting effect of confirmation in § 1327(b).32 The bankruptcy court acknowledged that the form plan ordinarily would capture the postconfirmation insurance proceeds for creditors. To avoid this outcome, the bankruptcy court held that the form plan “denied the debtors due process of law,” and the anti-vesting provision was “stricken from the confirmation order nunc pro tunc and given no effect.”33 The court explained:

If after obtaining confirmation of a plan, a debtor receives a windfall and proposes to pay the total projected disposable income before the end of the plan term, the trustee should accept the money, distribute it according to the plan, and grant the debtor a discharge. . . . It makes no sense to hold that § 1306(a)(1) brings the insurance proceeds into the Chapter 13 estate after confirmation when property that was in the estate at confirmation vests in the debtors and leaves the estate. In this court’s view, § 1327(b) negates the language of § 1306(a)(1) that would otherwise bring into the estate post-confirmation property acquired by the debtors before the closing, dismissal, or conversion of the case. . . . [T]he insurance funds are not property of the estate; they are property of the debtors available only to satisfy the claims of the Richardsons’ postpetition creditors. Property acquired by the debtors after confirmation, like property vested in them upon confirmation, is property of the debtors.34
[14]

Richardson provides sharp contrast to the usual grab for any postconfirmation windfall in a Chapter 13 case. Given that only the debtor can propose a Chapter 13 plan,35 it was perhaps a stretch to find a due process violation when the debtor used a form plan that proved to be unfavorable. But the outcome in Richardson is consistent with the view that Chapter 13 preserves postconfirmation good fortune for debtors if the plan otherwise satisfies the conditions for confirmation.


 

1  See discussion beginning at § 46.1  What Is Property of the Chapter 13 Estate?.

 

2  11 U.S.C. § 541(a)(1).

 

3  11 U.S.C. § 1306(a)(1).

 

4  See § 47.2 [ Gifts, Loans and Windfalls ] § 46.6  Gifts, Loans and Windfalls. See, e.g., In re Euerle, 70 B.R. 72 (Bankr. D.N.H. 1987) (Property of the estate includes $300,000 inheritance received by the debtor after confirmation.); In re Koonce, 54 B.R. 643 (Bankr. D.S.C. 1985) (Property of the estate includes $1.3 million won in lottery after confirmation.); Doane v. Appalachian Power Co., 19 B.R. 1007 (Bankr. W.D. Va. 1982) (money loaned to the debtor by a relative).

 

5  11 U.S.C. § 1327(b).

 

6  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

7  11 U.S.C. § 1327(c).

 

8  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

9  See, e.g., In re Nott, 269 B.R. 250 (Bankr. M.D. Fla. 2000) (Although property of the estate at confirmation vested in the debtor pursuant to § 1327(b), a $300,000 inheritance one year after confirmation is property of the estate pursuant to § 1306(a) and would be captured for creditors on a motion to modify the plan under § 1329.); In re Furgeson, 263 B.R. 28 (Bankr. N.D.N.Y. 2001) (Settlement proceeds from action for stay violation did not vest in debtors at confirmation because confirmation order conditioned revesting on approval by bankruptcy court and trustee; proceeds are payable to creditors on trustee’s motion to modify the confirmed plan under § 1329(a).).

 

10  See discussion beginning at § 126.1  Standing, Timing and Procedure and § 127.1  To Suspend Payments.

 

11  In re Koonce, 54 B.R. 643 (Bankr. D.S.C. 1985) (Court permits postconfirmation modification on trustee’s motion to increase dividend to unsecured claim holders to 100% to reflect that debtors won $1,300,000 in the Massachusetts State Lottery.).

 

12  In re Nott, 269 B.R. 250, 257, 258 (Bankr. M.D. Fla. 2000) ($300,000 inheritance one year after confirmation is property of the estate and would be captured for creditors by the best-interests-of-creditors test if a motion to modify is filed under § 1329. “[T]he Debtor’s mother passed away and the Debtor obtained the inheritance after confirmation of the Debtor’s chapter 13 plan. Since it was acquired postconfirmation but before the case has been closed, dismissed, or converted, the Court finds that the inheritance is property of the estate pursuant to § 1306(a) . . . . [I]t should be included in determining the amount that unsecured creditors would receive in a hypothetical chapter 7 case when applying the ‘best interest of creditors’ test under § 1325(a)(4) to any modified plan proposed in this case.” With respect to § 1327(b): “property of a chapter 13 estate that is in existence and disclosed as of the date of confirmation vests in the Debtor pursuant to § 1327(b). Any property acquired postconfirmation, however, is property of the estate pursuant to § 1306(a).”); In re Euerle, 70 B.R. 72 (Bankr. D.N.H. 1987) (Chapter 13 debtor who receives $300,000 inheritance after confirmation is obligated to advise the trustee of the inheritance and is obligated to file a supplemental schedule listing this additional asset pursuant to Bankruptcy Rule 1007(h). Trustee’s motion to modify the confirmed plan to require 100% payment of unsecured claims is granted.).

 

13  In re Easley, 205 B.R. 334, 335–36 (Bankr. M.D. Fla. 1996).

 

14  See § 126.2  Application of Tests for Confirmation and § 126.6  Modification after Confirmation after BAPCPA.

 

15  There is some controversy about the content of the Chapter 7 estate upon conversion from Chapter 13. See § 143.2  In Cases Filed after October 22, 1994 and § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.

 

16  See discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

17  See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?.

 

18  11 U.S.C. § 1325(b)(1). See discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

19  If the debtor moved to modify the plan after confirmation—for example, to use the postconfirmation windfall to accelerate payments under the plan—then, upon objection by the trustee or the holder of an allowed unsecured claim, it is arguable that § 1325(b) does apply. See §§ 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply? and 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11  To Extend or Reduce the Time for Payments. See, e.g., Forbes v. Forbes (In re Forbes), 215 B.R. 183 (B.A.P. 8th Cir. 1997) (Neither best-interests-of-creditors test nor disposable income test prohibits modification to cash out plan with settlement proceeds from postpetition cause of action. Original plan confirmed in 1994. In 1997, debtor received settlement from postpetition cause of action and proposed modification to reduce length of plan from 60 months to 40 months by making a lump-sum payment from the settlement proceeds. Modification did not violate § 1325(a)(4) because settlement proceeds were not property of the hypothetical Chapter 7 estate. Disposable income test was not applicable because plan already satisfied the three-year test in § 1325(b) counting from the date the first payment was due under the original confirmed plan.).

 

20  See discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General and § 126.3  Does Disposable Income Test Apply?.

 

21  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

22  This myopic view of income for Chapter 13 purposes is discussed in § 11.1  What Is Regular Income? and discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

23  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

24  See discussion of income, exemptions and property of the estate in § 11.1  What Is Regular Income? and discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

25  11 U.S.C. § 1327(a). See § 120.2  11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors and § 120.5  Effects of Confirmation after BAPCPA.

 

26  11 U.S.C. § 348(f)(1)(A), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994). See § 143.2  In Cases Filed after October 22, 1994 and § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.

 

27  140 Cong. Rec. H10,752, H10,770 (section-by-section analysis by Congressman Brooks).

 

28  140 Cong. Rec. H10,752, H10,770 (section-by-section analysis by Congressman Brooks).

 

29  Unless the inheritance falls within 180 days of the petition under § 541(a)(5) or property of the estate in § 348(f)(1)(A) is interpreted to include all of the property acquired by a debtor while the Chapter 13 case is pending. See § 143.2  In Cases Filed after October 22, 1994 and § 143.5  Bad-Faith Conversion.

 

30  If a Chapter 13 case filed after October 22, 1994, is converted to another chapter in “bad faith,” “property in the converted case shall consist of the property of the estate as of the date of conversion.” 11 U.S.C. § 348(f)(2), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994). See § 143.2  In Cases Filed after October 22, 1994 and § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.

 

31  283 B.R. 783 (Bankr. D. Kan. 2002).

 

32  The vesting effect of confirmation under § 1327(b) is discussed in § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate. Plan provisions to overcome the vesting effect are discussed in § 207.1 [ Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) ] § 113.11  Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b).

 

33  283 B.R. at 795–96.

 

34  283 B.R. at 799–802.

 

35  See § 55.1 [ Debtor Must File a Plan ] § 51.2  Debtor Must File a Plan.