Cite as: Keith M. Lundin, Lundin On Chapter 13, § 46.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
The expanded definition of property of the estate in a Chapter 13 case in § 13061 draws into the estate all property that the debtor acquires after the petition, including earnings from personal services by the debtor. The wages earned by the debtor are property of the Chapter 13 estate.2 Postpetition wages are property of the Chapter 13 estate notwithstanding that some or all of those wages were assigned or attached voluntarily or involuntarily before the petition.3 Payments to the debtor after the petition in lieu of wages are property of the Chapter 13 estate—for example, postpetition payments to the debtor on account of a prepetition noncompete agreement are property of the Chapter 13 estate.4
Deductions from a debtor’s postpetition earnings remain property of the Chapter 13 estate notwithstanding that the deductions are required by statute or contract. For example, compulsory deductions from a debtor’s salary for an employee savings plan were held to be property of the estate.5 Although authorized by the debtor, periodic postpetition deductions from a debtor’s salary paid to the debtor’s credit union are property of the Chapter 13 estate.6
Tax refunds, whether accrued or payable before or after the petition, are property of the Chapter 13 estate.7 The IRS’s right of setoff in a debtor’s tax refund may affect whether the debtor can use the refund and on what conditions,8 but the right of setoff does not defeat that the refund becomes property of the Chapter 13 estate.
A nonfiling spouse’s postpetition earnings ordinarily are not property of the Chapter 13 estate and are not protected by the automatic stay notwithstanding that the nonfiling spouse’s income may be essential to funding the debtor’s Chapter 13 plan.9 In a community property jurisdiction, depending on state law, § 541(a)(2) may draw into the Chapter 13 estate a nonfiling spouse’s postpetition earnings to the extent that income is liable for a claim against the debtor or a claim against the community. If state law would protect the nonfiling spouse’s income from claims against the debtor, then the nonfiling spouse’s income is not property of the Chapter 13 estate.10 Postpetition earnings by an incorporated individual are earnings of the corporation, not property of the individual’s Chapter 13 estate.11
1 See § 45.1 [ What Is Property of the Chapter 13 Estate? ] § 46.1 What Is Property of the Chapter 13 Estate?.
2 See United States Postal Serv. v. Hudson, 230 B.R. 542, 545 (W.D. Tenn. 1999) (“Hudson’s gross earnings constituted property of the bankruptcy estate under 11 U.S.C. § 1306(a)(2) and were therefore subject to the automatic stay.”); In re Taylor, 7 B.R. 506 (E.D. Pa. 1980) (Postpetition earnings from personal services are property of the Chapter 13 estate.); McCray v. McCray, 62 B.R. 11 (Bankr. D. Colo. 1986) (Postpetition earnings of the debtor remain in the debtor’s possession but constitute property of the estate and are protected by the automatic stay.). Accord In re Root, 61 B.R. 984 (Bankr. D. Colo. 1986); Ohning v. Schneider Nat’l Transcon., Inc., 57 B.R. 714 (Bankr. N.D. Ind. 1986); Denn v. Aarestad, 37 B.R. 33 (Bankr. D. Minn. 1983).
3 See, e.g., In re Steenstra, 280 B.R. 560, 567 & n.8 (Bankr. D. Mass. 2002) (Portion of postpetition wages assigned to the debtor’s children in a prepetition domestic relations order remain property of the Chapter 13 estate. “[The Massachusetts Department of Revenue] argues that the Support Order and [state law] vested a property interest in the children, and, therefore, the Debtor’s wages, to the extent of the wage assignment, never became property of the estate. That novel theory has no basis either in the language of the statute, the Probate Court Order, or more importantly, the Bankruptcy Code and caselaw.” In a note, “[p]ursuant to § 1306(a)(2), property of the estate is extended to include all ‘earnings from services performed by the debtor.’ . . . There is no statutory exclusion for earnings payable for the benefit of family support.”); In re Raspberry, 264 B.R. 495, 499–500 (Bankr. N.D. Ill. 2001) (Postpetition wages subject to a prepetition wage garnishment become property of the Chapter 13 estate and are protected by the automatic stay. Interpreting recently amended Illinois Wage Deduction Act, judgment creditor’s prepetition levy divests the debtor of any interest in wages garnished before the petition, but “[a] different result occurs concerning the Debtor’s post-petition wages . . . . [T]hose wages are expressly part of the bankruptcy estate pursuant to § 1306(a)(2) and are subject to the automatic stay under § 362(a). . . . [Sections] 362(a) and 1306(a)(2) preclude the enforcement of the state court wage deduction order as to the post-petition wages of the Debtor.” Continuing lien secures the unpaid balance of the prepetition judgment, and debtor provides adequate protection by making payments through a 100% plan. Bankruptcy court does not address avoidance of the continuing lien because debtor has not filed an adversary proceeding or sought to exempt the postpetition wages.); In re Suarez, 149 B.R. 193 (Bankr. D.N.M. 1993) (Expanded definition of property of the estate includes a debtor’s postpetition wages notwithstanding a state court divorce decree that required the debtor to pay a portion of those wages to his ex-spouse.); In re Scott, 142 B.R. 126 (Bankr. E.D. Va. 1992) (Future earnings of a debtor are property of the Chapter 13 estate notwithstanding that a portion of those earnings were voluntarily assigned to repay the debtor’s loan from his ERISA-qualified pension plan.). See also § 52.2 [ Relief from Garnishments ] § 50.2 Relief from Garnishments.
4 Lauria v. Titan Sec. Ltd. (In re Lauria), 243 B.R. 705, 709 (Bankr. N.D. Ill. 2000).
5 Ortiz Vega v. Asociacion Empleados Del Estado Libre Asociado (In re Ortiz Vega), 75 B.R. 858 (Bankr. D.P.R. 1987). See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3 Reasonably Necessary for Maintenance or Support.
6 In re Shepherd, 7 Bankr. Ct. Dec. (CRR) 956 (E.D. Pa. 1981). Accord Porter v. Goodyear Employees Credit Union, 25 B.R. 425 (Bankr. D. Vt. 1982).
7 Midkiff v. Dunivent (In re Midkiff), 271 B.R. 383 (B.A.P. 10th Cir. 2002) (Tax refund received after the trustee certified the completion of payments under confirmed plan was property of the Chapter 13 estate because case had not been closed and confirmed plan defined disposable income to include tax refunds to which the debtor became entitled during the first 36 months of the plan. Bankruptcy court appropriately vacated discharge order under Rule 60(b) to permit the trustee to administer the tax refund because certification of completion of payments was in error.), aff’d, 342 F.3d 1194 (10th Cir. 2003); Holden v. United States (In re Holden), 217 B.R. 161, 164 (D. Vt. 1997) (“A tax refund is a debt which becomes the property of the estate.” Tax refund for 1996 payable in 1997 is property of estate in a case filed in 1996 where the IRS asserts an administrative freeze to collect its prepetition claim and the confirmed plan proposes to pay that claim in full.); In re Beltz, 263 B.R. 525, 527 (Bankr. W.D. Ky. 2001) (“All of Debtors’ federal and state tax refunds received during the pendency of their Chapter 13 case are property of the estate, including the [Federal Child Tax Credit].”); Dougherty v. IRS (In re Dougherty), 187 B.R. 883 (Bankr. E.D. Pa. 1995) (Entitlement to a refund for tax year 1991 is property of the estate in a Chapter 13 case filed in 1994; however, because the three-year limitations period in 26 U.S.C. § 6511(a) expired, the IRS’s refusal to pay the refund is not a violation of the stay and the debtor is not entitled to turnover.); In re O’Brien, 181 B.R. 71, 75 (Bankr. D. Ariz. 1995) (Where plan provided “any net tax refunds for the first 36 months will be turned over to the Trustee,” the tax refunds received during the first 36 months remain property of the estate notwithstanding vesting effect of § 1327(b). Tax refunds received after 36 months after confirmation “are not property of the estate.”); In re Grissom, 137 B.R. 689 (Bankr. W.D. Tenn. 1992) (Postconfirmation tax refund is property of the estate.); Johnson v. IRS (In re Johnson), 136 B.R. 306, 309 (Bankr. M.D. Ga. 1991) (“The right to the portion of a tax refund that accrued prepetition is property of the bankruptcy estate even though the tax year has not ended. The fact that the refund amount does not become fixed until the end of the tax year does not limit the broad sweep of § 541(a) of the Bankruptcy Code.”); In re Price, 134 B.R. 313 (Bankr. N.D. Ill. 1991) (Tax refund related to earnings from postpetition services performed by the debtor is property of the Chapter 13 estate under § 1306.); Mack v. Pennsylvania Dep’t of Welfare, 46 B.R. 652 (Bankr. E.D. Pa. 1985) (Tax refund is property of estate to the extent that the wages to which the refund is allocable are property of the estate.); In re Holcomb, 18 B.R. 839 (Bankr. S.D. Ohio 1982) (Income tax refund is property of estate.). But see In re McCray, 172 B.R. 154, 156 (Bankr. S.D. Ga. 1994) (Tax refund received by Chapter 13 trustee after confirmation is not property of the estate and is not included in disposable income on the trustee’s motion to retain the refund and apply it to payments under the plan. “Since this case has been confirmed and the funds in question were received by Debtor following confirmation, it is correct to declare that the right to these funds has vested in Debtor. Such a vesting in Debtor precludes any determination that the funds would be properly considered as ‘property of the estate.’”); Murry v. Commissioner, 15 B.R. 325 (Bankr. E.D. Ark. 1981) (Tax refund not property of Chapter 13 estate where IRS has valid right of setoff.).
8 See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation and 72.1 [ Setoffs and Recoupments ] § 58.12 Setoffs and Recoupments.
9 See Goldsby v. United States (In re Goldsby), 135 B.R. 611 (Bankr. E.D. Ark. 1992) (Postpetition earnings of nondebtor spouse are not property of Chapter 13 estate and are not protected from levy by IRS. Nondebtor spouse’s wages were not committed to funding the plan.).
10 See, e.g., In re Nahat, 278 B.R. 108, 113–17 (Bankr. N.D. Tex. 2002) (Applying Texas community property law, postpetition earnings of nonfiling spouse are not property of the Chapter 13 estate and are not considered in the tests for confirmation. Citing § 541(a)(2), “[s]ince Mrs. Nahat’s current earnings were not held as of the commencement of the case, they are not ‘property of the estate’ . . . . [Under Texas law] the personal earnings of either husband or wife are community property. . . . During marriage, however, each spouse has sole management, control and disposition of his or her personal earnings. . . . Mrs. Nahat’s personal income is special community property that is not available to satisfy Debtor’s liabilities. . . . With respect to post-petition earnings, 11 U.S.C. § 1306 and the Texas Family Code make it clear that only the post-petition earnings of the debtor are included in the estate and are subject to inclusion in the Plan as a requirement of confirmation. Under Texas law, unlike that of some other community property jurisdictions, Mrs. Nahat’s earnings are hers to dispose of. They do not become property of the estate.”).
11 Vocque v. IRS, 60 B.R. 84 (Bankr. W.D. La. 1986) (Postpetition earnings were property of the debtor’s professional corporation and thus not protected by the automatic stay.).