§ 143.1     In Cases Filed before October 22, 1994
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 143.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

There has been much debate about the effect of conversion to Chapter 7 on entitlement to property in the estate and in particular on entitlement to money held by the Chapter 13 trustee at conversion. The 1984 amendments to § 1326 addressed but did not resolve the questions. The Bankruptcy Reform Act of 1994 rewrote § 348 to redefine property of the estate upon conversion. The 1994 amendments are effective in Chapter 13 cases filed after October 22, 1994.

[2]

This section analyzes the Code as it appeared before the 1994 amendments. The cases discussed in this section were filed before October 22, 1994, though many converted after that date. Such cases are controlled by the pre-1994 version of § 348. Entitlement to postpetition property in Chapter 13 cases filed after October 22, 1994, is discussed immediately below.1 All of the Code citations in this section are to the Bankruptcy Code prior to amendment in 1994, unless otherwise indicated. As explained throughout this section and the next, the pre-1994 analysis of entitlement to postpetition property at conversion must be understood to make sense of conversion in cases filed after October 22, 1994.

[3]

There is always property in the debtor’s possession or held by the Chapter 13 trustee at conversion from Chapter 13 to Chapter 7. Some of that property may have been scheduled at the filing of the Chapter 13 petition. Some may have been acquired during the Chapter 13 case. Property scheduled at the petition may have changed form or value because of appreciation or depreciation or an insured or uninsured loss during the Chapter 13 case. For a debtor engaged in business, it may be accounts receivable generated after the petition and before conversion. It may be income from the debtor’s job, the last paycheck or even a small savings account. There will be money paid to the Chapter 13 trustee but not yet distributed to creditors because Chapter 13 trustees do not make distributions every day. There may have been preferences paid or unauthorized postpetition transfers by the debtor during the Chapter 13 case that can be recovered by the Chapter 7 trustee for the benefit of all creditors.2

[4]

There are many suitors for the money and other property at conversion. The debtor wants it all. If the debtor cannot have it all, the debtor wants the portion subject to exemption in the Chapter 7 case. The debtor’s attorney wants the money either to pay the balance of Chapter 13 attorneys’ fees or to pay additional fees for the Chapter 7 case. The Chapter 7 trustee claims the funds and other property accumulated during the Chapter 13 case, as well as the residue of property left from the original Chapter 13 estate. The Chapter 7 trustee wants the money held by the Chapter 13 trustee to pay for administration of the Chapter 7 case. The holders of allowed claims in the Chapter 13 case want the money held by the Chapter 13 trustee distributed to them consistent with the plan. The Chapter 13 trustee may be owed fees and expenses from funds received prior to conversion.

[5]

Sections 348, 541, 1306 and 1326 conspire to make it difficult to decide who gets postpetition property at conversion to Chapter 7. For most purposes,3 § 348 says conversion does not change the date of the filing of the petition, the date of the order for relief or the date of commencement of the case.4 Thus, the Chapter 7 case is deemed to have commenced as of the date of the original Chapter 13 petition—a date that may be months or years prior to the date of conversion.

[6]

Section 541 defines property of the estate in a Chapter 7 case. Section 1306 defines property of the estate in a Chapter 13 case. The definition in § 1306 is significantly broader than the definition in § 541.5 Section 1306 includes in the Chapter 13 estate all property described in § 541 that is acquired by the debtor after the Chapter 13 petition. In a Chapter 7 case, with minor exceptions described in § 541(a)(5), property of the estate is frozen at the date of the petition, and assets or income acquired after the petition are not included in the Chapter 7 estate. Section 541(a)(7) contains a confusing addition to property of the estate of “any interest in property that the estate acquires after the commencement of the case.”6 This section is particularly difficult to apply in Chapter 13 cases that convert to Chapter 7 because the existence and extent of the estate is affected by whether property revested in the debtor at confirmation under § 1327(b).7

[7]

When § 348(a) “throws back” the date of commencement of the Chapter 7 case to the date of filing of the Chapter 13 case, does § 541 or § 1306, or some combination of the two, determine property of the Chapter 7 estate at conversion? Section 541(a)(6) specifically excludes from property of the estate in a Chapter 7 case earnings from services performed by an individual debtor after commencement of the case. Those same earnings are included in property of the estate in a Chapter 13 case “before the case is closed, dismissed, or converted to a case under Chapter 7” under § 1306(a)(2). If only § 541 is applied at the date of the original Chapter 13 filing, none of the debtor’s wages or property acquired after the Chapter 13 petition (except for that described in § 541(a)(5)) would be part of the Chapter 7 estate after conversion. If only § 541 is applied, it is difficult for the Chapter 7 trustee to assert an interest in the money held by the Chapter 13 trustee at conversion, which is typically a portion of the debtor’s last few (postpetition) paychecks.

[8]

Many courts have concluded that the Chapter 7 estate does not include property acquired by the Chapter 13 debtor after the filing of the original (Chapter 13) petition. For example, payment on a construction contract received by the debtor after the filing of a Chapter 13 petition, but before conversion to Chapter 7, is not property of the Chapter 7 estate.8 Accounts receivable accumulated by a Chapter 13 debtor between the filing in 1979 and conversion to Chapter 7 in 1984 are not subject to administration in the Chapter 7 case.9 A cause of action acquired by the debtor between the filing of the Chapter 13 case and conversion to Chapter 7 belongs to the debtor, not to the Chapter 7 estate.10 The Chapter 7 estate does not include a tort action that accrued after the original Chapter 7 petition when that Chapter 7 case was converted to Chapter 13 and then reconverted to Chapter 7.11 Applying § 541 and not § 1306, the Chapter 7 trustee can only recover a 1981 tax refund, a utility deposit and nonexempt wages that were payable to the debtor in 1981 when the debtor files a Chapter 13 case in 1981 and converts to Chapter 7 in 1983.12 A creditor is entitled to setoff against only that sum of money in the debtor’s bank account on the date of the original Chapter 13 petition and is not entitled to setoff against monies deposited after the Chapter 13 petition and before conversion to Chapter 7.13 Real property acquired by the debtors after the petition, but before conversion to Chapter 7, is not property of the Chapter 7 estate; thus, a prebankruptcy judicial lienholder does not have a lien on that postpetition real property.14

[9]

Many courts have applied only § 541, with the result that the debtor is entitled to recover all money in the hands of the Chapter 13 trustee at conversion, and the debtor need not use exemptions in the Chapter 7 case to keep those wages.15 In support of this outcome, the courts recall that Chapter 13 is a voluntary effort to pay creditors. Most Chapter 13 debtors were eligible to file a Chapter 7 case in the first instance. Refusing a refund of postpetition wages held by the trustee at conversion penalizes the debtor for attempting a Chapter 13 case. The debtor would have been entitled to all postpetition income had the case been a Chapter 7 from the beginning.16

[10]

In a case filed before but decided after enactment of the 1994 amendments to § 348(f),17 the U.S. Court of Appeals for the First Circuit held that postpetition income of a Chapter 13 debtor did not become property of the Chapter 7 estate at conversion.18 The court found the changes to the definition of property of the estate at conversion worked by the 1994 amendments were reason enough for this outcome:

Congress acted within the past year to demystify the situation. The Bankruptcy Reform Act of 1994 answered the very question that confronts us. It essentially codified the [Bobroff v. Continental Bank (In re Bobroff), 966 F.2d 797 (3d Cir. 1985),] rule, enacting a statutory provision designed to ensure that, on conversion from a Chapter 13 proceeding, 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. . . . [T]he newly crafted statute does not apply in this case. . . . Be that as it may, it ill behooves us to play the ostrich, struthiously pretending that the neoteric status is not now in force. Though the amendment does not affect the outcome of this appeal, it punctuates our opinion and strips it of virtually all precedential value. Where, as here, we face a lingering question of law that is defunct except as to a handful of ongoing cases, we see no point in writing at length either to elucidate our rationale or to justify our construction of an ambiguous statute that Congress has lately taken pains to clarify. . . . [W]e are confident that going further would merely add another floor to the Tower of Babel.19
[11]

Notwithstanding the formidable strength of the view that § 541 controls at conversion from Chapter 13 to Chapter 7, a significant number of reported decisions have defined property of the Chapter 7 estate to include property or income acquired during the Chapter 13 case, as if § 1306 applied. The principal source of this view is the U.S. Court of Appeals for the Eighth Circuit. In Resendez v. Lindquist,20 a divided panel of the Eighth Circuit concluded that funds held by the Chapter 13 trustee awaiting distribution to creditors became property of the Chapter 7 estate upon conversion and were not subject to exemption in the Chapter 7 case. As explained by the Eighth Circuit:

Since the debtor voluntarily made the payments in question to a Chapter 13 trustee for the benefit of all creditors, it would be unfair to permit the monies to be now claimed as exempt under his Chapter 7 proceeding on the basis that they had not been distributed to the creditors. In other words, at this stage it would be unfair to the unsecured creditors. . . . These funds no longer belonged to the debtors, but became part of their estate.21
[12]

The dissent in Resendez recalled that confirmation vested all property of the estate in the debtor except as otherwise provided in the plan.22 The dissent reasoned that the money received by the trustee from the debtors became part of the Chapter 13 estate, subject to distribution to creditors consistent with the plan. “Because the monies here in question were not distributed, the funds became part of the Chapter 7 estate and remain subject to the debtors’ exemptions. The debtors’ interest in the monies have [sic] not been extinguished.”23

[13]

Two years later, in Armstrong v. Lindberg (In re Lindberg),24 the Eighth Circuit held that the filing date of the original Chapter 13 petition controls the exemptions available to the debtor after conversion to Chapter 7. In Lindberg, the debtors’ homestead changed between the Chapter 13 petition and conversion to Chapter 7 when the debtors moved to a farm. Without discussion of Resendez, the Eighth Circuit in Lindberg stated:

[I]n a case converted from Chapter 13 to Chapter 7, the property of the estate consists of all property in which the debtor has an interest on the date of conversion. . . . We believe that the same date must control in determining what exemptions the debtor may claim from the estate. Only if the same date controls what is property of the estate and what exemptions may be claimed can the debtor make full use of the law.25
[14]

To reach this conclusion, the Eighth Circuit noted that at confirmation all property of the Chapter 13 estate vested in the debtor free and clear of the claims or interests of creditors; thus, “there was no estate from which property could be exempted.”26 In Lindberg, the Eighth Circuit held that it was equitable to permit the debtor to change the homestead exemption based on a change in where the debtor lived during the Chapter 13 case. The Eighth Circuit did not explain the seemingly contrary conclusion in Resendez that it is “unfair” for a debtor to claim exemption in the wages paid to the trustee during the Chapter 13 case.

[15]

There is a fundamental inconsistency between Resendez and Lindberg identified but not resolved by the Eighth Circuit itself in its later opinion in Security Bank of Marshalltown v. Neiman.27 The issue in Neiman was whether the Chapter 13 estate of a hog farmer continued to exist after confirmation so that postconfirmation debts for feed and veterinary services could be administrative expenses under § 503(b)(1)(A).28 In Neiman the Eighth Circuit cited Resendez in support of its holding that the Chapter 13 estate continued to exist postconfirmation, notwithstanding the vesting of property of the estate in the debtor at confirmation under § 1327(b):

[T]he estate continues to exist after confirmation of the Chapter 13 plan. . . . [E]ven if property of the estate vests in the debtor at confirmation, that does not necessarily mean that the estate no longer exists. The estate can continue to exist as a legal entity after confirmation. . . . “There must be an ‘estate’ upon and after confirmation, and that estate consists of the property and future earnings of the debtor dedicated to fulfillment of the Chapter 13 plan.”29
[16]

It is difficult to reconcile these three positions by the Eighth Circuit. The premise behind Resendez is that voluntary payment to the Chapter 13 trustee puts a debtor’s wages outside the estate and beyond the debtor’s reach upon conversion to Chapter 7. Neiman, to the contrary, confirms that the Chapter 13 estate continues to exist after confirmation and that the money paid by the debtor to the Chapter 13 trustee is part of that estate. The money paid by the Chapter 13 debtor to the trustee in Resendez was just as much a part of the postconfirmation estate as the debtor’s farm in Lindberg or the hog herd in Neiman. The debtor in Resendez should have been able to amend the exemption schedule at conversion to claim the money held by the Chapter 7 trustee.

[17]

The Eighth Circuit attempts in a footnote in Neiman to explain Lindberg and Resendez.30 The muddled picture that emerges is not satisfying. With all its internal inconsistencies, the Eighth Circuit’s view of the effects of conversion on entitlement to postpetition and postconfirmation property has been very influential on other courts.

[18]

The U.S. Court of Appeals for the Seventh Circuit carried the Eighth Circuit’s view one step further: in In re Lybrook,31 the Seventh Circuit held that an inheritance received by a Chapter 13 debtor more than 180 days after filing and before conversion to Chapter 7 became property of the Chapter 7 estate. This is especially startling because the Code is clear that had the debtor filed a Chapter 7 case in the first instance, the inheritance received more than 180 days after filing would not have been property of the estate under § 541(a)(5). The holding in Lybrook penalizes the debtor for filing a Chapter 13 case by giving the debtor’s inheritance to creditors that had no reasonable expectation of such an entitlement after the filing of the bankruptcy case. The statutory basis for the holding in Lybrook is unspoken. Rather, Judge Posner constructs a new rule:

[A] rule of once in, always in is necessary to discourage strategic opportunistic behavior that hurts creditors without advancing any legitimate interest of debtors. A debtor who lacks confidence that he can actually work his way out of his financial hole by payments under a Chapter 13 plan will nevertheless have an incentive to proceed under that chapter for as long as he can, holding his creditors at bay and thus staving off the evil day when they seize his assets. For he knows that if his position deteriorates further, it is the creditors who will bear the loss, while if he should get lucky and win a lottery or a legal judgment, or inherit money . . . he will be able to keep his windfall by the simple expedient of converting to Chapter 7.32
[19]

Judge Posner’s opinion in Lybrook tortures §§ 348, 541 and 1306 to avoid imagined horribles that are already managed by other sections of the Code. Upon conversion from Chapter 13 to Chapter 7, most debtors face substantial abuse analysis under § 707(b).33 If the Chapter 13 debtor “gets lucky” as postulated by Judge Posner, Chapter 7 trustees, the U.S. trustee, creditors and courts can be trusted to police access to Chapter 7. The debtor who is suddenly solvent who uses conversion to Chapter 7 as part of “strategic opportunistic behavior” will not survive a motion to dismiss in the Chapter 7 case.34 Distorting the concept of property of the estate in Lybrook to avoid an outcome controlled by § 707(b) is not benign—many innocent Chapter 13 debtors who have not inherited millions or won the lottery will lose a portion of their postpetition income at conversion from Chapter 13 to Chapter 7.

[20]

Citing Lybrook with approval, the U.S. Court of Appeals for the Tenth Circuit held in Calder v. Job (In re Calder)35 that property acquired by a Chapter 13 debtor before conversion is property of the Chapter 7 estate; however, the Tenth Circuit’s reasoning is different from the Seventh’s (or the Eighth’s):

During the pendency of the case in Chapter 13—when § 1306 applies—§ 1306 includes in “[p]roperty of the estate” after-acquired property and postpetition earnings from services performed by the debtor. 11 U.S.C. § 1306(a). Upon conversion to Chapter 7, § 541(a)(7) includes in the Chapter 7 estate “[a]ny interest in property that the estate acquires after the commencement of the case.” 11 U.S.C. § 541(a)(7). Reading these two provisions together, we hold that all property in plaintiff’s Chapter 13 estate—including any funds included pursuant to § 1306—are part of the post-conversion Chapter 7 estate.36
[21]

In Calder, the debtor filed a Chapter 7 case, converted to Chapter 13 and two months later, reconverted to Chapter 7, all without confirming a plan. The Tenth Circuit’s reliance on the interaction between §§ 1306(a) and 541(a)(7) to capture for the Chapter 7 estate property acquired by the debtor during the Chapter 13 case worked in Calder because no confirmation order was entered. At confirmation, absent a contrary provision of the plan or order of confirmation, property of the Chapter 13 estate vests in the debtor free and clear of the claims or interests of creditors provided for by the plan.37 After confirmation, § 541(a)(7) might work with § 1306(a) in the manner described by the Tenth Circuit in Calder but only with respect to income or other property specifically preserved as part of the postconfirmation estate.38 If the plan or order of confirmation preserved the Chapter 13 estate against the effect of § 1327(b),39 then Calder would include all postpetition property or income of the debtor in the Chapter 13 estate, and all that property might pass to the Chapter 7 trustee upon conversion.

[22]

The Tenth Circuit’s analysis in Calder is a reason to omit from the plan any provision overcoming the vesting effect of § 1327(b) to allow the estate to pass to the debtor at confirmation as a hedge against loss of postpetition property and income in the event of conversion. It has been held that the vesting effect of § 1327(b) entitles the debtor to monies held by the Chapter 13 trustee at conversion of a confirmed case.40 The risk for the debtor in this strategy is that some courts have concluded that the unfettered vesting of property in the debtor at confirmation under § 1327(b) also marks the termination of the automatic stay, exposing the debtor to collection actions by postpetition creditors.41

[23]

Calder also refused the debtor’s amendment to exempt property acquired after the filing of the original Chapter 7 petition.42 The Tenth Circuit cited equitable grounds, including “prejudice to creditors,” as its reason for denying amendment of the exemption schedule. In this respect, Calder is similar to Resendez—both the Eighth and the Tenth Circuits have doubly penalized debtors for attempting and failing in Chapter 13 cases—first by capturing postpetition property and income for the Chapter 7 estate and then by refusing amendment of exemptions in the Chapter 7 case.

[24]

Adopting the Eighth Circuit’s view, one court explained that property of the Chapter 7 estate consists of all property in which the debtor had an interest on the date of conversion because it is only fair to require the debtor to give up postpetition property when postpetition claims will become prepetition claims and are subject to discharge in the Chapter 7 case pursuant to § 348(d).43 Other courts follow the Eighth Circuit’s approach, some with and some without addressing whether the debtor can exempt property acquired after the petition but before conversion.44

[25]

On memorable facts, the U.S. Court of Appeals for the Fifth Circuit extended Calder and Lybrook to a startling conclusion in Baker v. Rank (In re Baker).45 The debtors in Baker were attorneys. During their Chapter 13 case, the debtors received a contingent fee of $11,700. The debtors proposed to use the money to take a vacation. The debtors consulted bankruptcy counsel and were told that they could take the trip “as long as they continued to make the monthly payment required under their reorganization plan.”46 The debtors were current under the plan and took the vacation trip. Three months later, on a creditor’s motion, the Chapter 13 case was converted to Chapter 7. The creditor then objected to discharge in the Chapter 7 case under § 727(a)(2), arguing that the debtors used the contingent fee for a vacation with actual intent to hinder, delay or defraud creditors.

[26]

To reach the § 727(a)(2) issue, the Fifth Circuit first had to determine that the contingent fee was property of the Chapter 7 estate after conversion. Extracting the broadest statements by the Seventh and Tenth Circuits, the Fifth Circuit concluded that the contingent fee earned and expended during the Chapter 13 case was property of the Chapter 7 estate that would support a § 727(a)(2) objection to discharge after conversion:

We agree with the Tenth Circuit when it observed that “[a] proper reading of § 348 indicates that it is not a source of disruption but, instead, preserves the continuity of the bankruptcy proceedings.” [Calder v. Job (In re Calder), 973 F.2d 862 (10th Cir. 1992)] . . . . “[T]he bankruptcy estate, following conversion from Chapter 13 to Chapter 7, is the Chapter 13 bankruptcy estate. . . . It also includes ‘any interest in property that the estate acquires after the commencement of the case.’” . . . This construction requires that all post-petition income of the Chapter 13 estate remains property of the estate upon conversion to Chapter 7. Moreover, it prevents Chapter 13 from becoming a financial planning device designed to give debtors a temporary reprieve from their creditors. As Judge Posner, writing for the Seventh Circuit, explained, “a rule of once in, always in is necessary to discourage strategic, opportunistic behavior that hurts creditors without advancing any legitimate interest of debtors.” In re Lybrook, [951 F.2d 136 (7th Cir. 1991)] . . . . [B]efore the enactment of [11] U.S.C. § 348(f)(1)(a), post-petition property of a Chapter 13 estate remains property of the estate upon conversion to Chapter 7.47
[27]

Baker is a harsh message for debtors in pre-1994 Chapter 13 cases. The logic of Baker is that any use of a debtor’s income during a Chapter 13 case can bar the debtor’s discharge under § 727(a)(2) in the event of conversion to Chapter 7. That the debtors were current under the plan and acted on the advice of counsel carried no weight before the Fifth Circuit. The advice of counsel in Baker was dispatched by the Fifth Circuit as “so patently wrong, no reasonable debtor . . . could reach such a conclusion.”48

[28]

Section 1326 further confuses the sorting out of property and income at conversion to Chapter 7.49 Section 1326(a)(2) was amended in 1984 to describe what is done with the payments by the debtor that must commence within 30 days after the plan is filed:

A payment made under this subsection shall be retained by the trustee until confirmation or denial of confirmation of a plan. If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan. If a plan is not confirmed, the trustee shall return any such payment to the debtor, after deducting any unpaid claim allowed under section 503(b) of this title.50
[29]

Section 1326(a)(2) is clear that confirmation affects entitlement to the money paid by a Chapter 13 debtor to fund a proposed plan. The section says nothing about conversion from Chapter 13 to Chapter 7. The section does not purport to supersede § 348 at conversion to Chapter 7.

[30]

The courts have struggled to make sense of § 1326(a)(2) at conversion from Chapter 13 to Chapter 7. Some courts read § 1326(a)(2) to require return to the debtor of all funds held by the Chapter 13 trustee when no plan was confirmed at the time of conversion.51 Notwithstanding § 1326(a)(2), it has been held that money paid to the Chapter 13 trustee becomes an asset of the Chapter 7 estate if confirmation is denied and the debtor voluntarily converts.52 Attempting an accommodation of § 1326(a)(2) and the rights of creditors in the superseded Chapter 13 case, one court held that payments accumulated before conversion must be turned over to the Chapter 7 trustee, but the Chapter 7 trustee must return the money to the debtor after deducting administrative expenses under § 503(b) and “any regular monthly payments to any prepetition secured creditors.”53

[31]

When conversion occurs after confirmation, several reported decisions—some citing § 1326(a)(2)—adopt the view that “the creditors’ right to receive funds pursuant to the confirmed plan vests at the time the trustee receives the funds and debtors can no longer retain any reasonable expectation that such funds will be returned to them under any circumstances, including a conversion or dismissal.”54 One court explained that “[t]he mere happenstance of the delay inherent in accounting for the receipt of the debtor’s wages and the preparing and mailing of checks should not defeat vested statutory rights.”55 The equities of this view were stated by another court:

It appears to this Court to be patently unfair to allow a debtor to drive and depreciate an automobile, occupy a home or use household goods based on a promise to his creditors in the form of a court approved plan, and then allow the debtor to snatch away the monies which the trustee is holding to make the payments, but has not yet disbursed, by allowing the debtor to pick an opportune time to convert. The unfairness to secured creditors is not remedied by holding that money in the chapter 13 trustee’s possession at the time of conversion becomes property of the chapter 7 estate, even if the debtor is not allowed to claim an exemption in the funds. The distribution scheme under chapter 7 would result in the funds . . . being distributed to unsecured creditors of the [chapter 7] estate.56
[32]

None of these cases addresses whether § 348 divests whatever “vested” rights creditors may have had under the confirmed plan. Also, these cases leave the Chapter 13 trustee precariously responsible for distributions to creditors even though § 348(e) instantaneously terminated the services of the Chapter 13 trustee at conversion to Chapter 7.57 One court read § 1326(a)(2) more carefully to conclude that confirmation of the Chapter 13 plan does not defeat a debtor’s right to recover the payments held by the Chapter 13 trustee at conversion:

By its terms, § 1326(a)(2) does not pertain to funds received by a trustee after confirmation of a Chapter 13 plan. The cases finding “creditor vesting” of post-confirmation payments by implication from § 1326(a)(2) do so without citing legislative history. . . . I cannot conclude that Congress intended legislatively to create trusts for creditors in enacting § 1326(a)(2) and (c). . . . [C]reditors have had the benefit of distribution from debtors’ wage contributions, which would not have been available to them under Chapter 7. . . . [T]here seems no inherent inequity in refunding undisbursed wage contributions to debtors on conversion. . . . Since conversion is effective upon notice, it perforce has no less effect on a plan than a dismissal would. . . . If a plan is vacated or no longer in effect, a Chapter 13 trustee has no authority for further disbursement to creditors. . . . [T]he Congressional policy of encouraging debtors to repay their creditors via Chapter 13 is furthered by debtors . . . knowing they will not be penalized for attempting Chapter 13. . . . Debtors effectively converted the case by filing their Motion, and . . . are entitled to the funds held by the Trustee.58
[33]

The debtor’s attorney and the Chapter 13 trustee may also have dogs in the hunt. Section 1326(a)(2) tells us that if no plan is confirmed, the Chapter 13 trustee must refund payments made by the debtor “after deducting any unpaid claim allowed under § 503(b) of this title.” Upon conversion, if fees have not been fully paid, the debtor’s attorney will have a § 503(b) administrative expense in the superseded Chapter 13 case.59 If the money held by the Chapter 13 trustee in an unconfirmed case becomes property of the Chapter 7 estate at conversion, debtor’s counsel must battle the Chapter 7 trustee to protect whatever rights remain under § 1326(a)(2). The debtor’s attorney can assert an administrative expense from the superseded Chapter 13 case in the Chapter 7 case and be entitled to payment just behind the expenses of liquidation pursuant to 11 U.S.C. § 726(b); but if the Chapter 7 is a little or no-asset case, that priority will be worthless.

[34]

If the funds held by the Chapter 13 trustee do not become part of the Chapter 7 estate at conversion before confirmation, counsel battles the debtor for the money. The debtor’s attorney must file a request for an administrative expense to satisfy § 1326(a)(2)—quickly, because the services of the Chapter 13 trustee have been terminated by § 348(e).

[35]

If no plan is confirmed, the standing trustee may be entitled to recover the percentage fee allowed under 28 U.S.C. § 586(e).60 As discussed elsewhere,61 the percentage fee of a standing trustee under 28 U.S.C. § 586(e) is not identified as an administrative expense under § 503(b). In an unconfirmed case, if the percentage fee is not an administrative expense under § 503(b), then the debtor may argue for return of the payments held by the trustee at conversion to Chapter 7 without deduction for trustee’s fees. Reported decisions, without specifically addressing the question, indicate that trustees deduct fees in unconfirmed cases before refund to the debtor under § 1326(a)(2).62

[36]

Section 1326(b) bears on the question whether a standing trustee is entitled to recover the percentage fee from funds received from the debtor before conversion to Chapter 7. 11 U.S.C. § 1326(b) provides:

Before or at the time of each payment to creditors under the plan, there shall be paid—
(1) any unpaid claim of the kind specified in section 507(a)(1) of this title; and
(2) if a standing trustee appointed under section 586(b) of title 28 [1302(d) of this title] is serving in the case, the percentage fee fixed for such standing trustee under section 586(e)(1)(B) of title 28.
[37]

Payments to creditors under Chapter 13 plans typically do not commence until after confirmation. However, § 1326(b) contemplates collection of a standing trustee’s percentage fee “before or at the time of each payment to creditors under the plan.” This language is subject to several interpretations. “Before or at the time of each payment to creditors” could be read to allow a standing Chapter 13 trustee to recover the percentage fee in confirmed and unconfirmed cases. If so interpreted, § 1326(b)(2) would always support an argument by the Chapter 13 trustee for recovery of the percentage fee from the funds on hand at conversion to Chapter 7.

[38]

Further complicating these issues is the question whether the funds held by the trustee were deducted from the debtor’s wages and/or received by the trustee before or after conversion. Typically, employers deduct from the debtor’s paycheck each pay period and remit to the trustee one or more times per month. There will be some transaction time in the conversion to Chapter 7. There will be lag time before the employer receives an order canceling the income deduction order. Payments in transit from an employer may straddle the date of conversion to Chapter 7. It has been held that postconversion deductions from a debtor’s paycheck belong to the debtor and are not subject to the claims of any other party at conversion to Chapter 7.63 Courts applying § 541 at the date of conversion, rather than retrospectively to the date of the Chapter 13 petition, might include in the Chapter 7 estate wages deducted before conversion but remitted to the Chapter 13 trustee after conversion.


 

1  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.

 

2  See, e.g., Security Bank of Marshalltown v. Neiman, 1 F.3d 687 (8th Cir. 1993) (After conversion from Chapter 13 to Chapter 7, Chapter 7 trustee successfully recovered preferential transfers by the Chapter 13 debtor.).

 

3  Principal among the exceptions listed in § 348(b) is that the date of conversion becomes the date of the order for relief for purposes of discharge in the Chapter 7 case. See § 314.1 [ On Postpetition Claims ] § 142.5  On Postpetition Claims.

 

4  11 U.S.C. § 348(a).

 

5  See discussion beginning at § 46.1  What Is Property of the Chapter 13 Estate? See also § 58.3  Additional Protection for Postpetition Property and Income.

 

6  11 U.S.C. § 541(a)(7).

 

7  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.

 

8  Blood v. Wineburg (In re Marshall), 79 B.R. 147 (Bankr. N.D.N.Y. 1987).

 

9  In re Lepper, 58 B.R. 896 (Bankr. D. Md. 1986).

 

10  Hannan v. Kirschenbaum, 24 B.R. 691 (Bankr. E.D.N.Y. 1982).

 

11  Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797 (3d Cir. 1985).

 

12  Genova v. Thurman, 43 B.R. 108 (Bankr. D. Colo. 1984).

 

13  Oliphant v. Amarillo Pantex Fed. Credit Union, 40 B.R. 577 (Bankr. N.D. Tex. 1984). Accord Figgers v. Dayton Power & Light Employees Fed. Credit Union (In re Figgers), 121 B.R. 772 (Bankr. S.D. Ohio 1990) (After conversion from Chapter 13 to Chapter 7, credit union has right of setoff in debtor’s share account only in amount that was in account at the filing of the original Chapter 13 case. Money added to the share account after filing, but before conversion, is earnings from personal services. Court is required to look back to the date of Chapter 13 petition to determine what constitutes property of the Chapter 7 estate. Section 541(a)(6) excludes from property of the Chapter 7 estate earnings from services performed by debtor after commencement of the Chapter 7 case.).

 

14  Hudson v. Lowe’s of Miss. (In re Hudson), 103 B.R. 781 (Bankr. N.D. Miss. 1989).

 

15  Smith v. Strickland, 178 B.R. 524, 527 (M.D. Fla. 1995) (“Therefore, upon conversion, Section 541 governs what property is included in and excluded from the estate of a Chapter 7 case. Thus, because Section 541(a)(6) specifically excludes post-petition earnings, it is unnecessary for Debtor to claim such property as exempt.”); In re Bemish, 200 B.R. 408, 409 (Bankr. M.D. Fla. 1995) (Citing In re Gorski, 85 B.R. 155 (Bankr. M.D. Fla. 1988), money held by Chapter 13 trustee at conversion in a case filed before October 22, 1994, belongs to the debtor and need not be exempted in the Chapter 7 case. “[T]he court must look to section 541 of the Bankruptcy Code to determine what is included in or excluded from the bankruptcy estate. . . . Pursuant to section 541(a)(6), wages earned after the filing of the petition are not part of the Chapter 7 bankruptcy estate. . . . Because § 541(a)(6) excludes post-petition earnings, the Debtor need not claim such property as exempt.”); In re Bullock, 41 B.R. 637, 640 (Bankr. E.D. Pa. 1984) (Section 541, not § 1306, controls the estate upon conversion. “[S]ince the deducted wages were not part of the Chapter 7 estate, the debtor is entitled to recover such wages in full without regard to his exemption claim.”). Accord In re de Voss, 76 B.R. 157 (N.D. Cal. 1987); Tucker v. Hendren (In re Tucker), 133 B.R. 819 (Bankr. W.D. Tex. 1991); In re Gorski, 85 B.R. 155 (Bankr. M.D. Fla. 1988); Thrush v. Erchenbrecher (In re Erchenbrecher), 85 B.R. 42 (Bankr. N.D. Ohio 1988); Waugh v. Saldamarco (In re Waugh), 82 B.R. 394 (Bankr. W.D. Pa. 1988); In re Redick, 81 B.R. 881 (Bankr. E.D. Mich. 1987); McCullough v. Luna (In re Luna), 73 B.R. 999 (N.D. Ill. 1987); In re Peters, 44 B.R. 68 (Bankr. M.D. Tenn. 1984); In re McFadden, 37 B.R. 520 (Bankr. M.D. Pa. 1984).

 

16  See Smith v. Strickland, 178 B.R. 524, 527 (M.D. Fla. 1995) (“[I]t would appear contrary to the congressionally declared public policy choices underlying Chapter 13, to penalize a debtor for attempting a repayment plan by including, upon conversion, his post-filing payments in either the Chapter 13 or Chapter 7 estate. . . . Such payments would clearly have been ‘after-acquired assets,’ and thus excluded, had they simply chosen to file a liquidating Chapter 7 petition in the first instance. . . . Therefore, upon conversion, Section 541 governs what property is included in and excluded from the estate of a Chapter 7 case. Thus, because Section 541(a)(6) specifically excludes post-petition earnings, it is unnecessary for Debtor to claim such property as exempt.”); In re Bemish, 200 B.R. 408, 409 (Bankr. M.D. Fla. 1995) (“Although an argument can be made that the creditors were expecting a distribution of the post-petition monies upon confirmation of a Chapter 13 plan, the court notes that to allow these monies to remain in the Chapter 7 bankruptcy estate upon conversion could discourage debtors from utilizing Chapter 13.”); In re Rutenbeck, 78 B.R. 912 (Bankr. E.D. Wis. 1987); In re Shattuck, 62 B.R. 14 (Bankr. D.N.H. 1986).

 

17  See § 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2  In Cases Filed after October 22, 1994.

 

18  Young v. Key Bank (In re Young), 66 F.3d 376 (1st Cir. 1995).

 

19  66 F.3d at 378–79.

 

20  691 F.2d 397 (8th Cir. 1982).

 

21  691 F.2d at 399.

 

22  See 11 U.S.C. § 1327(b). 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.

 

23  691 F.2d at 400.

 

24  735 F.2d 1087 (8th Cir.), cert. denied, 469 U.S. 1073, 105 S. Ct. 566, 83 L. Ed. 2d 507 (1984).

 

25  735 F.2d at 1090.

 

26  735 F.2d at 1089.

 

27  1 F.3d 687 (8th Cir. 1993).

 

28  See § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate, § 122.4  Effects of Confirmation on Postpetition Claims§ 136.14  Miscellaneous Administrative Expenses and Priority Claims before BAPCPA§ 136.15  Miscellaneous Administrative Expenses and Priority Claims after BAPCPA, § 137.1  Postpetition Claims before BAPCPA and § 137.2  Postpetition Claims after BAPCPA.

 

29  1 F.3d at 690–91 (emphasis added).

 

30  1 F.3d at 690 n.5.

 

31  951 F.2d 136 (7th Cir. 1991).

 

32  951 F.2d at 137–38.

 

33  See § 4.4 [ 11 U.S.C. § 707(b) Problems Are Likely ] § 8.6  11 U.S.C. § 707(b) Problems Are Likely. The substantial abuse test for dismissal of a Chapter 7 case in 11 U.S.C. § 707(b) is available in Chapter 7 cases “filed by an individual debtor . . . whose debts are primarily consumer debts.” 11 U.S.C. § 707(b). The debtor in In re Lybrook, 951 F.2d 136 (7th Cir. 1991), may not have been subject to 707(b) analysis because most of the debts were not consumer debts. However, at least one other court of appeals has indicated that analysis identical to substantial abuse under § 707(b) can be applied to Chapter 7 debtors under 11 U.S.C. § 707(a), without the limitations in § 707(b). See Industrial Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124 (6th Cir. 1991); In re Krohn, 886 F.2d 123 (6th Cir. 1989).

 

34  See In re Hargis, 103 B.R. 912, 917 n.2 (Bankr. E.D. Tenn. 1989) (In a footnote, court observes that § 707(b) would be applicable to a debtor after conversion from Chapter 13 to Chapter 7 to prevent a Chapter 13 debtor from using conversion to Chapter 7 to discharge remaining debts that could easily be paid through continuation of the Chapter 13 plan.).

 

35  973 F.2d 862 (10th Cir. 1992).

 

36  973 F.2d at 866. Accord Hunter v. Patton (In re Patton), 200 B.R. 172, 175 (Bankr. N.D. Ohio 1996) (At conversion, proceeds of lawsuit for personal injury during Chapter 13 case are property of the Chapter 7 estate, subject to partial exemption. “Here, as in [Calder v. Job (In re Calder), 973 F.2d 862 (10th Cir. 1992)], the Court concludes that sections 1306 and 541(a)(7), read together, mandate a finding that the Proceeds represented property of the estate. . . . [S]ince a postpetition, preconversion debt is treated ‘for all purposes’ as a prepetition debt, 11 U.S.C. § 348(d) . . . it would be inequitable to hold that a debtor’s postpetition, preconversion assets are beyond the reach of a debtor’s creditors.” Ohio law allows a $5,000 exemption; Chapter 7 trustee awarded a judgment for balance of insurance proceeds.).

 

37  11 U.S.C. § 1327(b), (c). See § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate§ 120.4  11 U.S.C. § 1327(c): Free and Clear Effect on Liens  and § 120.5  Effects of Confirmation after BAPCPA

 

38  Several courts have held that the Chapter 13 estate continues after confirmation notwithstanding § 1327(b). 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.

 

39  See § 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).

 

40  In re de Voss, 76 B.R. 157 (N.D. Cal. 1987).

 

41  See § 124.3  Does Confirmation Dissolve the Stay?§ 137.1  Postpetition Claims before BAPCPA and § 137.2  Postpetition Claims after BAPCPA.

 

42  See § 317.1 [ Exemptions at Conversion ] § 144.1  Exemptions at Conversion.

 

43  In re Dyess, 65 B.R. 143 (Bankr. W.D. La. 1986). See § 314.1 [ On Postpetition Claims ] § 142.5  On Postpetition Claims. See also In re Mansuy, 94 B.R. 443 (Bankr. N.D. Ohio 1988) (Ordinarily, the debtor’s postpetition earnings would not constitute estate property upon conversion from Chapter 13 to Chapter 7; however, when the debtor accumulated the funds on hand at conversion by failing to comply with an order to make payments to the standing Chapter 13 trustee, the funds held by the debtor and not otherwise subject to exemption are payable to the Chapter 7 trustee to prevent “an undeserved windfall to a recalcitrant debtor.”).

 

44  See Hunter v. Patton (In re Patton), 200 B.R. 172, 175 (Bankr. N.D. Ohio 1996) (At conversion, proceeds of lawsuit for personal injury during Chapter 13 case are property of the Chapter 7 estate, subject to partial exemption. “Here, as in [Calder v. Job (In re Calder), 973 F.2d 862 (10th Cir. 1992)], the Court concludes that sections 1306 and 541(a)(7), read together, mandate a finding that the Proceeds represented property of the estate. . . . [S]ince a postpetition, preconversion debt is treated ‘for all purposes’ as a prepetition debt, 11 U.S.C. § 348(d) . . . it would be inequitable to hold that a debtor’s postpetition, preconversion assets are beyond the reach of a debtor’s creditors.” Ohio law allows a $5,000 exemption; Chapter 7 trustee awarded a judgment for balance of insurance proceeds.); Groupe v. Hill (In re Hill), 156 B.R. 998, 1004 (Bankr. N.D. Ill. 1993) (At conversion to Chapter 7 from Chapter 13 after confirmation of a plan, the Chapter 7 estate includes real property that revested in the debtor at confirmation. “It is logical to include property previously ‘revested’ in the Debtor under a confirmed Chapter 13 plan as part of the bankruptcy estate upon the Debtor’s subsequent voluntary conversion to Chapter 7. Otherwise, a debtor could reap a potential windfall to the creditors’ detriment upon conversion to Chapter 7. This is contrary to the bankruptcy policy of paying claims of creditors pro rata from the non-exempt assets of the debtor which pass into the bankruptcy estate. . . . The Seventh Circuit has held that a Chapter 13 estate passes unaltered into Chapter 7 upon conversion. In re Lybrook, 951 F.2d 136, 138 (7th Cir. 1991). Accordingly, the Court subscribes to the view that the Chapter 7 estate includes all remaining property in which the Chapter 13 debtor had an interest on the date of the conversion to Chapter 7.” On summary judgment, court refuses to allow Chapter 7 trustee to recover real property that was conveyed by the debtor after conversion from Chapter 13 to Chapter 7 and then reconveyed to a third-party bona fide purchaser where the Chapter 7 trustee did not record notice of the bankruptcy petition consistent with § 549(c).); In re Bartlett, 149 B.R. 446, 447–49 (Bankr. W.D. Tex. 1992) (Real property acquired by a Chapter 13 debtor after confirmation of a Chapter 13 plan and before conversion to Chapter 7 is property of the Chapter 7 estate but can be exempted in the Chapter 7 case. “There is a split of authority regarding the effect of conversion to Chapter 7 on the property of the estate. . . . Several courts, relying on the language of [§ 348(a)], have held that a converted case should be treated as though it had been originally filed under the chapter to which it has been converted, so that property of the estate is determined as of the original filing date. . . . Under this ‘relation-back’ theory, property which constituted property of the Chapter 13 estate only by virtue of the operation of § 1306(a) would not pass into the Chapter 7 estate, because that section does not apply in Chapter 7 cases. . . . The instant case does not involve post-petition earnings, however. It involves property acquired by the estate post-petition, i.e. property which would have come into the estate anyway had the case been originally filed under Chapter 7, as property acquired with estate property. See 11 U.S.C. § 541(a)(7). As a result, the property at issue would be property of the estate, even under the relation-back theory. . . . A number of circuit courts . . . have rejected the relation-back theory altogether, favoring instead the date of conversion as determinative for assessing what is property of the estate in the converted case. . . . This court agrees with [In re Lybrook, 951 F.2d 136 (7th Cir. 1991),] that the date of conversion should control the definition of property of the estate for the converted case (at least in a conversion from Chapter 13 to Chapter 7). . . . The effect of the relation-back theory is to ignore all that has transpired prior to conversion; the potential for abuse described in Lybrook is enhanced when debtors are allowed to repudiate actions taken while under Chapter 13 by simply converting to Chapter 7. . . . For these reasons, the court will look to the date of conversion in determining what is property of the estate.”); In re Burke, 147 B.R. 955 (Bankr. W.D. Mo. 1992) (Lump-sum settlement of debtor’s rights in a pension plan received after the Chapter 13 petition and before conversion to Chapter 7 became property of the Chapter 13 estate under § 1306(a)(1) and became property of the Chapter 7 estate by virtue of § 541(a)(1). Home purchased with pension settlement is estate property by virtue of § 541(a)(6).); In re Welch, 115 B.R. 374 (Bankr. M.D. Fla. 1990) (After conversion, Chapter 7 trustee must turn over to the debtor as exempt property that portion of wage deductions during the Chapter 13 case that are attributable to the wages of the head of household. Any portion of the funds paid to the Chapter 13 trustee and held by the Chapter 7 trustee after conversion that are not attributable to the wages of the head of a household will be property of the Chapter 7 estate. Court does not discuss § 1326.); In re Bump, 54 B.R. 657 (Bankr. D.N.J. 1985) (Applying Bankruptcy Rule 1019, Chapter 7 trustee gets debtor’s preconfirmation payments to Chapter 13 trustee. Exemption question is not addressed.); In re Wanderlich, 36 B.R. 710 (Bankr. W.D.N.Y. 1984) (Funds paid to trustee prior to confirmation become part of Chapter 7 estate upon conversion and may be claimed exempt in the Chapter 7 case.); In re Tracy, 28 B.R. 189 (Bankr. D. Me. 1983) (Money deducted from wages earned before conversion becomes property of the Chapter 7 estate. Court reserves question whether debtor can amend to exempt.); In re Tworek, 107 B.R. 666 (Bankr. D. Neb. 1989).

 

45  154 F.3d 534 (5th Cir. 1998).

 

46  154 F.3d at 535.

 

47  154 F.3d at 535–38.

 

48  154 F.3d at 538.

 

49  See § 44.5  Return of Payments to Debtor, § 44.7  Disposition of Preconfirmation Payments after BAPCPA and § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.

 

50  This is 11 U.S.C. § 1326(a)(2) before further amendment in 1994. The Bankruptcy Reform Act of 1994 amended § 1326(a)(2) to require the Chapter 13 trustee to distribute payments in a confirmed plan “as soon as practicable.” 11 U.S.C. § 1326(a)(2), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 307, 108 Stat. 4106 (1994). See § 53.10  Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise§ 53.11  Payments to Creditors before Confirmation and § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.

 

51  See Smith v. Strickland, 178 B.R. 524, 526–27 (M.D. Fla. 1995) (At conversion from Chapter 13 to Chapter 7 before confirmation, funds paid to the Chapter 13 trustee belong to the debtor and need not be exempted in the Chapter 7 case. “Section 1326(a)(2) was added under the Bankruptcy Amendments and Federal Judgeship Act of 1984. . . . By its express terms, Section 1326(a)(2) directs the Chapter 13 trustee to return postpetition wages to the debtor if a plan is not confirmed. . . . This Court does not believe that such a literal application of Section 1326(a)(2) defeats the plain purpose of the statute. Rather, the Bankruptcy Code reflects a congressional intent to make attractive and thus, encourage filing of voluntary Chapter 13 petitions. . . . [I]t would appear contrary to the congressionally declared public policy choices underlying Chapter 13, to penalize a debtor for attempting a repayment plan by including, upon conversion, his post-filing payments in either the Chapter 13 or Chapter 7 estate. . . . Such payments would clearly have been ‘after-acquired assets,’ and thus excluded, had they simply chosen to file a liquidating Chapter 7 petition in the first instance. . . . Therefore, upon conversion, Section 541 governs what property is included in and excluded from the estate of a Chapter 7 case. Thus, because Section 541(a)(6) specifically excludes post-petition earnings, it is unnecessary for Debtor to claim such property as exempt.”); In re Mann, 160 B.R. 517, 523–24 (Bankr. D. Vt. 1993) (At conversion from Chapter 13 to Chapter 7 before confirmation of a plan, Chapter 13 debtor is entitled to a refund of the monies turned over by the Chapter 13 trustee to the Chapter 7 trustee. “Under 11 U.S.C. § 348(a), conversion of a case under the Bankruptcy Code does not affect the date of petition filing, case commencement, or orders for relief. By the plain meaning of § 348, the date of filing of the petition is not altered; therefore, the property of the estate should be determined according to § 541 at the time the original Chapter 13 petition was filed. . . . The clear statutory directive of later enacted § 1326(a)(2) does not conflict with § 348(a), nor may it be overruled by a mere bankruptcy rule, namely F.R.Bkrtcy.P. 1019(a). Contrary to Judge Posner’s rule in [In re Lybrook, 951 F.2d 136 (7th Cir. 1991),] . . . that ‘once in, always in,’ Congress can mandate a rule that ‘what Congress taketh away, Congress can giveth back.’ We conclude that funds received preconfirmation, but undistributed, belong to the debtor after the case is converted to a Chapter 7.”); In re Brown, 118 B.R. 1008 (Bankr. E.D. Mo. 1990) (Section 1326(a)(2) is controlling of entitlement to funds held by the Chapter 13 trustee after conversion before confirmation. Court overrules Chapter 7 trustee’s objection to the debtor’s claim of exemption in the monies held by the Chapter 13 trustee.); In re Gorski, 85 B.R. 155 (Bankr. M.D. Fla. 1988) (When the Chapter 13 plan is not confirmed at the time of conversion to Chapter 7, § 1326(a)(2) requires the trustee to return to the debtor funds paid to the Chapter 13 trustee prior to conversion.); In re Lennon, 65 B.R. 130 (Bankr. N.D. Ga. 1986) (If no plan has been confirmed, § 1326(a)(2) requires undistributed payments to be returned to the debtor.); In re Richardson, 20 B.R. 490 (Bankr. W.D.N.Y. 1982) (When the plan was not confirmed, upon conversion funds held by the trustee belong to the debtor and are not part of either the Chapter 13 or the Chapter 7 estate.); In re Milledge, 94 B.R. 218 (Bankr. M.D. Ga. 1988). See also In re Radebaugh, 125 B.R. 797 (Bankr. W.D. Mo. 1991) (Before confirmation of a Chapter 13 plan, a debtor may claim funds paid to the Chapter 13 trustee as exempt in the Chapter 7 case because, under § 1326(a)(2), the trustee is required to “return” to the debtor any payments made to the trustee. The rule changes once the plan is confirmed.).

 

52  In re Daniels, 79 B.R. 28 (Bankr. S.D. Fla. 1987). Accord In re Holly, 109 B.R. 524 (Bankr. S.D. Ga. 1989) (Funds paid to the Chapter 13 trustee prior to conversion in an unconfirmed Chapter 13 case are not subject to the debtor’s claim of exemption and constitute property of the Chapter 7 estate. The Chapter 13 trustee is required to pay over money on hand to the Chapter 7 trustee, and the Chapter 7 trustee must then pay creditors holding allowed secured claims that were to be paid through the Chapter 13 plan. Creditors with secured claims who were depending on the preconfirmation payments to the Chapter 13 trustee as “adequate protection” are entitled to administrative expense claims at conversion.).

 

53  In re Schmeltz, 114 B.R. 607 (Bankr. N.D. Ind. 1990) (Money in the hands of the Chapter 13 trustee after conversion to Chapter 7 remained property of the estate upon conversion. The Chapter 13 trustee must turn over the payments to the Chapter 7 trustee pursuant to Bankruptcy Rule 1019(5). The Chapter 7 trustee must return any remaining portion of the payments to the debtor pursuant to § 1326(a)(2), but the Chapter 7 trustee must first deduct any administrative expenses under § 503(b), “including any regular monthly payments to any prepetition secured creditors.” Court cites In re Holly, 109 B.R. 524 (Bankr. S.D. Ga. 1989), with approval.). Accord In re Holly, 109 B.R. 524 (Bankr. S.D. Ga. 1989) (Secured claim holders are entitled to adequate protection payments prior to confirmation in the form of payments by the Chapter 13 debtor to the trustee. If the case converts to Chapter 7 prior to confirmation of a plan, secured claim holders will receive no payments, and the “adequate protection” will have proven to be inadequate. Affected secured creditors are entitled to alternative compensation in the form of administrative expense claims. They are entitled to pro rata satisfaction of those claims out of the monies the debtor has paid to the trustee.).

 

54  Ledford v. Burns (In re Burns), 90 B.R. 301 (Bankr. S.D. Ohio 1988). Accord In re Verdunn, 210 B.R. 621, 625–26 (Bankr. M.D. Fla. 1997) (On remand, debtor cannot recover payments to IRS under confirmed plan before confirmation was reversed on appeal because ineligibility was not jurisdictional and conversion to Chapter 7 does not divest IRS of its entitlement to payments during Chapter 13 case. “Section 348 is not intended to be ‘a source of disruption but, instead, preserves the continuity of the bankruptcy proceedings.’ . . . [T]he committee notes to Rule 1019 governing conversion emphasize the Rule ‘is not intended to invalidate any action taken in the superseded case before its conversion to chapter 7.’ . . . Understandably, courts have extended this philosophy to preserve the integrity of plan distributions made to creditors prior to conversion of the case. To do otherwise would fly in the face of all logic and equity, since if the creditors have a vested right in payments made to the Chapter 13 Trustee for disbursement under the plan, payments actually received by creditors pursuant to the plan could have no lesser status. . . . [T]he payments made to the IRS pursuant to the terms of the confirmed plan became vested when received by the Chapter 13 Trustee. The subsequent disbursement to the IRS has certainly not weakened that status.”); In re Leonard, 150 B.R. 709, 710 (Bankr. W.D. Ark. 1992) (After confirmation, § 1326(a)(2) requires distribution of monies paid to the Chapter 13 trustee, notwithstanding conversion to Chapter 7. Section 1326(a)(2) provides that if a plan is confirmed, “the trustee shall distribute any such payment in accordance with the plan.” “However, Fed.R.Bankr.P. 1019(4) appears to contradict 11 U.S.C. § 1326 because Rule 1019(4) provides that ‘[a]fter qualification of, or assumption of duties by the chapter 7 trustee, any . . . trustee previously acting in the chapter . . . 13 case shall, forthwith, . . . turn over to the chapter 7 trustee all . . . property of the estate in the possession or control of the . . . trustee.’ . . . Courts that have authorized the chapter 13 trustee to distribute funds on hand pursuant to the confirmed plan rely primarily on the specific language of 11 U.S.C. § 1326(a)(2). . . . The District Court for the Eastern District of Arkansas has also held that the provisions of 11 U.S.C. § 1326 must be followed. . . . Therefore, the chapter 13 [trustee] . . . is authorized to distribute the funds in his possession pursuant to the confirmed plan.”); In re Galloway, 134 B.R. 602 (Bankr. W.D. Ky. 1991) (Money in the hands of the Chapter 13 trustee at conversion to Chapter 7 is properly distributed to creditors consistent with the confirmed plan. “Section 1326 specifically describes the treatment of the plan payments. . . . If plan payments are made, pursuant to a confirmed plan, then the trustee shall distribute any such payments in accordance with the plan. . . . When a case is converted to a Chapter 7 after entry of an order of confirmation, the Chapter 13 trustee shall distribute any funds in accordance with the terms of the plan and not pay funds to the Chapter 7 trustee.”); In re Halpenny, 125 B.R. 814 (Bankr. D. Haw. 1991) (Chapter 13 trustee appropriately distributed $3,375 on hand at the time of conversion from Chapter 13 to Chapter 7 to creditors consistent with the confirmed plan. “The confirmed plan is a new agreement between the debtor and his creditors. . . . [A]fter paying towards a confirmed plan and holding the creditors at bay, the debtor should not be allowed to convert to Chapter 7 and further thwart the creditors who had reasonable expectations to receive payments under the confirmed plan. . . . Under 11 U.S.C. § 1326, when a debtor voluntarily pays funds to the Chapter 13 trustee pursuant to the terms of a confirmed plan, the creditors have a vested right to receive the funds at the time the trustee receives the funds. Because of this vesting, the debtor no longer has any interest in these funds. Thus, the funds in the hands of the Chapter 13 trustee should be distributed pursuant to the provisions of the confirmed plan.”); In re Radebaugh, 125 B.R. 797 (Bankr. W.D. Mo. 1991) (After conversion of a confirmed Chapter 13 to Chapter 7, debtor may not exempt undistributed plan payments in the Chapter 7 case. “[O]nce the plan is confirmed, the trustee is required to distribute the payments to the creditors. . . . Unlike preconfirmation, the debtor is no longer entitled to the money. The payments are due to the creditors. This changes the nature of the money from the debtor’s earnings to part of the estate. . . . Therefore, the debtor is not entitled to the exemption [provided under Missouri law for “earnings”] because the money no longer constitutes ‘earnings’ of the debtor.”); In re de Voss, 76 B.R. 157 (N.D. Cal. 1987); Waugh v. Saldamarco (In re Waugh), 82 B.R. 394 (Bankr. W.D. Pa. 1988); In re Redick, 81 B.R. 881 (Bankr. E.D. Mich. 1987); In re Rutenbeck, 78 B.R. 912 (Bankr. E.D. Wis. 1987); In re Lennon, 65 B.R. 130 (Bankr. N.D. Ga. 1986).

 

55  In re Redick, 81 B.R. 881, 887 (Bankr. E.D. Mich. 1987).

 

56  O’Quinn v. Brewer (In re O’Quinn), 143 B.R. 408, 413 (Bankr. S.D. Miss. 1992).

 

57  11 U.S.C. § 348(e) provides: “Conversion of a case under section . . . 1307 . . . of this title terminates the service of any trustee . . . that is serving in the case before such conversion.” See Bankruptcy Rule 1019(4), which requires at conversion from Chapter 13 to Chapter 7 that the Chapter 13 trustee “shall, forthwith, unless otherwise ordered, turn over to the Chapter 7 trustee all . . . property of the estate in the possession or control of the . . . trustee.” But see In re Leonard, 150 B.R. 709, 710 (Bankr. W.D. Ark. 1992) (“However, Fed.R.Bankr.P. 1019(4) appears to contradict 11 U.S.C. § 1326.”). Compare In re Mann, 160 B.R. 517, 524 (Bankr. D. Vt. 1993) (The “clear statutory directive” in § 1326(a)(2) that the debtor is entitled to a refund of the monies turned over by the Chapter 13 trustee to the Chapter 7 trustee at conversion of a Chapter 13 case before confirmation cannot be “overruled by a mere bankruptcy rule, namely F.R.Bkrtcy.P. 1019[(4)].”).

 

58  In re Boggs, 137 B.R. 408, 410–11 (Bankr. W.D. Wash. 1992).

 

59  See § 44.5  Return of Payments to Debtor, § 44.7  Disposition of Preconfirmation Payments after BAPCPA, § 54.9  Compensation When Case Is Dismissed or Converted before Confirmation, § 73.9  Attorney Fees after BAPCPA, § 136.6  Debtors’ Attorneys’ Fees before BAPCPA§ 136.7  Debtors’ Attorneys’ Fees after BAPCPA, § 137.1  Postpetition Claims before BAPCPA and § 137.2  Postpetition Claims after BAPCPA.

 

60  See § 54.1  Standard Percentage Fee and Expenses§ 54.2  Compensation and Expenses of Chapter 13 Trustee after BAPCPA and § 54.9  Compensation When Case Is Dismissed or Converted before Confirmation.

 

61  See § 54.9  Compensation When Case Is Dismissed or Converted before Confirmation, § 73.2  What Claims Are Priority Claims?§ 73.3  Priority Claims Added or Changed by BAPCPA, § 136.4  Trustee’s Fees and Expenses before BAPCPA  and § 136.5  Trustees’ Fees and Expenses after BAPCPA.

 

62  See § 44.5  Return of Payments to Debtor§ 54.9  Compensation When Case Is Dismissed or Converted before Confirmation and § 136.5  Trustees’ Fees and Expenses after BAPCPA. See, e.g., In re Doherty, 229 B.R. 461 (Bankr. E.D. Wash. 1999) (At dismissal before confirmation when state of Washington levied on trustee before trustee could return payments to the debtor under § 1326(a)(2), trustee is entitled by local rule to deduct $516 for administrative expenses before paying balance of $9,330 to the state.).

 

63  In re Richardson, 20 B.R. 490 (Bankr. W.D.N.Y. 1982).