Cite as: Keith M. Lundin, Lundin On Chapter 13, § 45.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
One of the special attractions of Chapter 13 is that the debtor remains in possession and control of all property of the estate unless the debtor desires otherwise. Section 1306(b) clearly states: “Except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.”1
The Chapter 13 debtor rather than the trustee is empowered to use, sell or lease property of the estate even outside the ordinary course of business. This power of a Chapter 13 debtor is plainly stated in § 1303: “Subject to any limitations on a trustee under this chapter, the debtor shall have, exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f) and 363(l) of this title.”2 In stark contrast to a Chapter 7 case, the Chapter 13 trustee does not interrupt the debtor’s possession or enjoyment of estate property.3
The most important practical consequence of the Chapter 13 debtor’s exclusive control of estate property is that the debtor remains in possession of and may continue to use property of the estate despite liens, security interests, defaults or other claims of creditors.4 This exclusive right of possession of all estate property is protected by the automatic stay.5 For example, though the debtor is in default of payments on a home mortgage or payments on a car note, the debtor continues to live in the house and can use the car pending confirmation of a plan and no creditor can act to divest the debtor of possession or interfere with the debtor’s use without risking sanctions for violating the stay. The boundary of the Chapter 13 debtor’s exclusive right of possession and use is the expanded definition of property of the estate in a Chapter 13 case.6 The cost of a debtor’s possession and use of estate property prior to confirmation, may be that the debtor provide adequate protection to any lienholder.7
The Chapter 13 debtor can use property of the estate to fund a plan. For example, a debtor can lease estate property and use the income to make payments to creditors.8
The exclusive right of the debtor to use estate property combines with other powers to advance the management of financial affairs through a Chapter 13 plan. For example, one court cited the Chapter 13 debtor’s right to use property of the estate under §§ 363(b) and 1303 in support of an order requiring a lienholder to let the debtor take his car to Germany where he had been assigned by the Army notwithstanding a geographic restriction in the contract: “In taking the car to Germany, Debtor is merely attempting to use the vehicle pursuant to § 363.”9
The Chapter 13 debtor can sell property of the estate prior to confirmation or as part of a plan. If the debtor has excess property or desires to reduce debt by selling property before confirmation, the debtor can simply comply with Bankruptcy Rule 6004 and conduct a public or private sale. Debtor’s counsel must be careful to follow the notice and hearing requirements of § 363(b) and Bankruptcy Rule 6004; otherwise, any sale of Chapter 13 property in advance of confirmation may be subject to attack.10 In most jurisdictions, the debtor gives notice to creditors of a proposed preconfirmation sale. An objection commences a contested matter, and a hearing must be held consistent with Bankruptcy Rule 9014.
The debtor’s powers in a Chapter 13 case include the power to sell property free and clear of liens under 11 U.S.C. § 363(f).11 If the debtor has equity in an item of property and desires to liquidate the property in order to use the equity, the debtor can notice a sale free and clear of lien(s) under § 363(f)(2) and Bankruptcy Rule 6004(c). As explained by the Seventh Circuit in Bass v. Fillion:12
Section 1303 of the Bankruptcy Code allows Chapter 13 debtors to sell real estate just as a bankruptcy trustee could under 11 U.S.C. § 363(f), and this provision authorizes the trustee to sell real estate which is subject to a bona fide dispute (with the disputed claims to attach to the proceeds of the sale). 11 U.S.C. § 363(f)(4).
It has been held that Chapter 13 debtors may even exercise the power in 11 U.S.C. § 363(h) to sell property owned by tenants in common notwithstanding the absence of a reference to § 363(h) in § 1303.13 The § 363(h) power may be important to a debtor who continues to own property with a former spouse and who desires to liquidate that property without the consent of the former spouse. However, the absence of a reference to § 363(h) in the list of debtor powers in § 1303 is some evidence that Congress did not contemplate that Chapter 13 debtors would have a trustee’s power to involuntarily divide tenancies. As discussed below,14 the absence of a clear statutory grant to Chapter 13 debtors of turnover, avoidance and recovery powers under §§ 542 (turnover), 544 (strong arm), 547 (preferences) and 548 (fraudulent conveyances) has produced a fruit salad of conflicting decisions, at best agreeing only on the exercise of such powers to protect exemptions under § 522(h).
The Chapter 13 debtor’s exclusive control of property of the estate includes the right to sue and be sued15 and also includes the right to control litigation involving the debtor. In a Chapter 7 case, all lawsuits in which the debtor has a right of recovery become property of the Chapter 7 estate and are controlled by the Chapter 7 trustee. In a Chapter 13 case, the debtor controls all causes of action, and the debtor, not the Chapter 13 trustee, determines whether and on what terms to settle.16
The debtor’s exclusive control of property of the estate includes control of property that comes into the estate after the filing of the petition.17 Bankruptcy Rule 1007(h) requires a Chapter 13 debtor to file a supplemental schedule if the debtor receives an inheritance, property settlement or life insurance benefit within 180 days after the filing of the petition,18 but the debtor remains in possession and control of any property so acquired.
1 11 U.S.C. § 1306(b).
2 11 U.S.C. § 1303.
3 See EconoLube N’ Tune, Inc. v. Frausto (In re Frausto), 259 B.R. 201, 211 (Bankr. N.D. Ala. 2000) (“[O]ther than relaying the funds directly entrusted to the trustee by the debtor pursuant to a confirmed plan, a Chapter 13 Trustee, unlike a Chapter 7 trustee, has no statutory obligation, right, duty or power to sell, use, lease, collect, liquidate or distribute any property, whether that property is denominated ‘property of the estate’ or ‘property of the debtor.’ . . . [A] Chapter 13 debtor has the authority to and choice to administer the ‘property of the estate.’ . . . The Chapter 13 debtor, rather than the Trustee, is specifically endowed, pursuant to section 1303, with the authority, ‘exclusive of the trustee,’ to use, sell or lease property of the estate.”); In re Smith, 51 B.R. 273 (Bankr. D.D.C. 1984) (Debtor has exclusive power to sell home, but trustee has a claim for compensation.); Aycock v. Heritage Bank, 15 B.R. 728 (Bankr. E.D.N.C. 1981) (Section 363 powers referred to in § 1303 and § 1304 are exclusively for the use of the debtor.).
4 In re Thacker, 6 B.R. 861 (Bankr. W.D. Va. 1980) (Section 1303 gives debtor the special advantage of continuing to use personal property encumbered by liens.). Accord GMAC v. English, 20 B.R. 877 (Bankr. E.D. Pa. 1982); First Inv. Co. v. Custer, 18 B.R. 842 (Bankr. S.D. Ohio 1982).
5 See § 68.1 [ Usual Protections ] § 58.1 Usual Protections.
6 See § 68.2 [ Additional Protection for Postpetition Property and Income ] § 58.3 Additional Protection for Postpetition Property and Income.
7 See § 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation.
8 See In re Robertson, 84 B.R. 109 (Bankr. S.D. Ohio 1988) (Leasing of debtor’s logging equipment produces regular income to fund plan.). See § 9.11 [ Income from Leasing, Selling or Liquidating Assets ] § 12.11 Income from Leasing, Selling or Liquidating Assets.
9 McGlockling v. Chrysler Fin. Co. (In re McGlockling), 296 B.R. 884, 888 (Bankr. S.D. Ga. 2003).
10 See Federal Nat’l Mortgage Ass’n v. Foster, 19 B.R. 28 (Bankr. E.D. Pa. 1982) (Debtor’s failure to give proper notice and hearing of sale out of the ordinary course of business renders the sale voidable.).
11 11 U.S.C. § 1303.
12 181 F.3d 859, 862 (7th Cir. 1999) (Chapter 13 debtor can sell real property to fund plan notwithstanding dispute with respect to ownership between debtor and debtor’s father.).
13 See In re Belyea, 253 B.R. 312, 314 (Bankr. D.N.H. 1999) (Chapter 13 debtor’s power to use estate property under §§ 363(b) and 1303 includes the power to use § 363(h) to partition real property in which the debtor inherited an interest. “[A] Chapter 13 debtor may utilize section 363(h) because pursuant to section 1303 a Chapter 13 debtor has the power of the Chapter 13 trustee under section 363(b) and section 363(h) specifically incorporates section 363(b) by reference.” Partition of jointly held property is an implied power in § 363(h). Partition is appropriate because debtor’s one-third interest and the tax lien that attaches to it can be divided from his sister’s two-thirds interest and the IRS has agreed to release the lien on the sister’s interest. Partition can be accomplished as part of the confirmation process, and the debtor need not file a separate adversary proceeding.); Rishel v. Rishel, 166 B.R. 276, 278 (Bankr. W.D. Pa. 1994) (Chapter 13 debtor can use § 363(h) and (j) to sell both the estate’s interest and a co-owner’s interest in real property; however, § 363(j) requires that the attorneys’ fees in connection with the sale be paid from the debtor’s share. “Although the trustee powers given to a Chapter 13 debtor pursuant to § 1303 do not specifically include subsection (h) or (j), the statute § 363(h) states that ‘the trustee may sell both the estate’s interest, under subsection (b) or (c) of this section . . . .’ Therefore, the effect of § 363(h) is to grant the trustee authority to sell property of a debtor by virtue of § 363(b). Subsection (b) of § 363 is specifically included in § 1303. The debtor has the power of a trustee under 11 U.S.C. § 363(b) which is incorporated into 11 U.S.C. § 363(h). . . . [T]he court finds that the Congressional scheme intended a Chapter 13 debtor to step into the shoes of the Chapter 13 trustee when the debtor utilizes either § 363(h) or § 363(j). Accordingly, the attorneys’ fees for the Debtor must be paid by the Debtor’s sole share of the sale proceeds and not pro rata.”); Yakubesin v. Yakubesin (In re Yakubesin), 83 B.R. 462 (Bankr. S.D. Ohio 1988) (Using § 363(h), permits Chapter 13 debtor to sell property in which the debtor’s former wife has a one-half interest.); Janoff v. Janoff, 54 B.R. 741 (Bankr. D.N.J. 1985) (Chapter 13 debtor probably has § 363(h) power to sell property held by tenants in common notwithstanding absence of reference to § 363(h) in § 1303.). See also In re Lowery, 203 B.R. 587, 590 (Bankr. D. Md. 1996) (Chapter 13 debtor may have the special power of a trustee to sell a co-owner’s interest in property under § 363(h); however, nondebtor ex-spouse does not have the power in § 363(h) and cannot force the sale of the debtor’s interest notwithstanding a prepetition state court divorce judgment requiring sale of the debtor’s and the movant’s interest. “In spite of the seemingly limited language in § 1303, however, a debtor may have the power to invoke § 363(h) as well. . . . However, . . . the Bankruptcy Code does not grant a non-debtor co-owner such right.”).
14 See § 50.1 Turnover of Property, § 50.2 Relief from Garnishments, § 50.3 Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances, § 50.4 Avoidance Powers after BAPCPA, § 50.5 Preferences after BAPCPA, § 50.6 Fraudulent Transfers after BAPCPA and § 50.7 Postpetition Transfers.
15 See § 54.1 [ Can Debtor Sue and Be Sued? ] § 51.1 Can Debtor Sue and Be Sued?.
16 See, e.g., Campion v. Credit Bureau Servs., Inc., 206 F.R.D. 663, 669 (E.D. Wash. 2001) (Debtor, not Chapter 13 trustee, has possession and control of the debtor’s interest in a class action against Credit Bureau Services for misconduct in connection with writs of garnishment. “Except as provided in a confirmed plan or order confirming a plan, the debtor remains in possession of all property of the estate. . . . Neither the Order Confirming Chapter 13 Plan nor the confirmed Chapter 13 Plan, withdraws Mr. Campion’s possession of any of the property of his bankruptcy estate. . . . Mr. Campion remains in possession of all legal claims that could be brought for the benefit of his bankruptcy estate.”); In re Wirmel, 134 B.R. 258 (Bankr. S.D. Ohio 1991) (Chapter 13 debtor’s right to sue and be sued may be exercised concurrently with the trustee, but debtor “owns” a civil rights action and controls whether and on what terms to settle the lawsuit. After conversion from Chapter 7 to Chapter 13, the Chapter 7 trustee has no control over the settlement of the civil rights lawsuit.).
17 See § 45.1 [ What Is Property of the Chapter 13 Estate? ] § 46.1 What Is Property of the Chapter 13 Estate?. See, e.g., Rivera v. Proctor (In re Rivera), 186 B.R. 505, 507 (D. Kan. 1995) (Debtor’s postconfirmation lawsuit against an employer for wrongful termination is property of the estate, and can be prosecuted by the debtor in district court after withdrawal of the reference.).
18 See § 41.3 [ Preconfirmation Amendment of Petition, Statements, Schedules and Lists ] § 41.2 Preconfirmation Amendment of Petition, Statements, Schedules and Lists.