§ 113.11 — Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b)

Revised: June 7, 2004

[1]

Upon confirmation, except as otherwise provided in the plan or the order confirming the plan, “confirmation of a plan vests all of the property of the estate in the debtor.”1 There is much disagreement among the courts about the effect of § 1327(b) on the rights of debtors and creditors after confirmation.2

[2]

It has been held that, absent a plan provision overcoming § 1327(b), at confirmation the Chapter 13 estate ceases to exist and the automatic stay of actions against property of the estate expires.3 This dissolution of the estate at confirmation may expose the debtor to collection action by a former spouse or by a postpetition claim holder.4 The debtor engaged in business faces the same problem on an even larger scale. If the debtor’s postconfirmation earnings are not property of the estate because of § 1327(b), then a postpetition trade creditor can proceed against the debtor’s postpetition business earnings without seeking relief from the automatic stay.

[3]

The debtor is best positioned to defend the problems created by § 1327(b) by always including in the plan a provision continuing the estate and overcoming the vesting effect of § 1327(b) until completion of payments under the plan. Coupled with the expanded definition of estate property in § 1306,5 this puts the debtor in the strongest position to argue that the stay continues to protect all property and income after confirmation.

[4]

The bankruptcy court in In re Martinez6 discussed debtor and creditor perspectives on retention of property in the estate. In the Western District of Texas, the standard form plan apparently contains a provision that property of the estate is not revested in the debtor at confirmation. From the debtor’s perspective, the court explained, “This continuation of the estate has the effect of sheltering the debtor and the debtor’s assets with the automatic stay during the life of the plan.”7 This positive protection for the debtor has a “negative side” for home lenders: “The lender cannot act to protect itself in the event of a default in the current mortgage payments until the lender gets relief from the automatic stay.”8 Given that only the debtor can propose the plan in the first instance,9 most debtors would choose continuing protection of the automatic stay after confirmation.

[5]

Retention of property in the Chapter 13 estate can benefit creditors when property of the estate appreciates after confirmation or the estate acquires new property after confirmation. Some courts have held that on the motion of the trustee or of an allowed unsecured claim holder a Chapter 13 plan can be modified after confirmation to increase payments to creditors when the value of the estate goes up because of appreciating property or new acquisitions.10 This outcome flows from application of the best-interests-of-creditors test at modification when the value of the estate goes up and that extra value is captured for distribution to creditors. Retaining property of the estate after confirmation can increase the debtor’s exposure to the argument that payments to creditors should increase when the value of the estate goes up after confirmation.11

[6]

One bankruptcy court went to great lengths to prevent just that outcome. In In re Richardson,12 the bankruptcy court acknowledged that life insurance proceeds received after confirmation ordinarily would become property of the Chapter 13 estate when the plan contained a provision that overcame § 1327(b). But when the trustee moved to modify the plan to increase payments to creditors based on the life insurance proceeds, the bankruptcy court found that inclusion of the retention provision in the form confirmation order “denied the debtors due process of law.” To “save” the debtors from having to pay the postconfirmation insurance proceeds to creditors, the bankruptcy court struck the retention provision from the confirmation order “nunc pro tunc.”

[7]

There is another potential downside for the debtor to retaining property in the estate through the plan: property that does not vest in the debtor under § 1327(b) is not automatically free and clear of the claims of creditors provided for by the plan under § 1327(c).13 Plans that overcome the vesting effect in § 1327(b) should be specific about the retention of liens. For example, the plan might state that secured claim holders retain liens only to the extent of each allowed secured claim and then only until the allowed amount of each secured claim is paid through the plan.14

[8]

Albeit in dicta, the U.S. Court of Appeals for the Seventh Circuit suggested there are limits on a Chapter 13 debtor’s discretion to retain property in the estate after confirmation. In Black v. United States Postal Service (In re Heath),15 the Seventh Circuit held that the bankruptcy court lacked jurisdiction over a trustee’s adversary proceeding to recover a $50 fee charged by the U.S. Postal Service to process an income deduction order in a Chapter 13 case. This holding is vulnerable to criticism at many levels.16 But for present purposes, the basis of the Seventh Circuit’s jurisdictional conclusion was a provision of the confirmed plan that “the debtor’s income and other assets . . . remain estate property to the extent necessary to fulfill the plan.” The Seventh Circuit reasoned that the $50 taken from the debtor’s wages to pay the Postal Service was not necessary to fulfill the plan, so it was not property of the estate. This conclusion pushed the debtor’s adversary proceeding outside bankruptcy court jurisdiction and inspired the curious dicta:

We read . . . 1306(a)(2) and 1327(b), to mean simply that while the filing of the petition for bankruptcy places all the property of the debtor in the control of the bankruptcy court, the plan upon confirmation returns so much of that property to the debtor’s control as is not necessary to the fulfillment of the plan. It would presumably be an abuse of discretion for the bankruptcy judge to confirm a plan that retained more of the property in the hands of the trustee than was reasonably necessary to fulfill the plan, though we need not decide that in this case.17
[9]

Perhaps thankfully, the Seventh Circuit in Heath does not attempt to explain why it would be an “abuse of discretion” for a Chapter 13 plan to retain the entire estate after confirmation when only part of that estate—wages committed to funding the plan—is necessary to “fulfill the plan.” The limitation suggested by the Seventh Circuit isn’t found in the Bankruptcy Code and is fundamentally flawed. Retention of property in the Chapter 13 estate does not put property “in the hands of the trustee.” Quite the contrary—by statute the trustee is prohibited from possessing property of the estate in a Chapter 13 case.18 As explained above, retention of the estate after confirmation protects interests of both debtors and creditors in Chapter 13 cases. Nothing elsewhere in Chapter 13 suggests that Chapter 13 debtors are compelled to subject themselves to postconfirmation collection actions that would be subject to the automatic stay if the plan overcomes the vesting effect of § 1327(b). There has been no stampede of reported decisions adopting the Seventh Circuit’s dicta limiting retention of the estate after confirmation.


 

1  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.

 

2  See discussion beginning at § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts.

 

3  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 and 243.1 [ Does Confirmation Dissolve the Stay? ] § 124.3  Does Confirmation Dissolve the Stay?.

 

4  See §§ 245.1 [ Postpetition Claims and Relief from the Stay ] § 124.5  Postpetition Claims and Relief from the Stay and 246.1 [ Alimony and Support Collection after Confirmation ] § 124.6  Alimony and Support Collection after Confirmation.

 

5  See § 68.2 [ Additional Protection for Postpetition Property and Income ] § 58.3  Additional Protection for Postpetition Property and Income.

 

6  281 B.R. 883 (Bankr. W.D. Tex. 2002).

 

7  281 B.R. at 885 n.1.

 

8  281 B.R. at 885 n.1.

 

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

 

10  See §§ 254.1 [ Application of Tests for Confirmation ] § 126.2  Application of Tests for Confirmation and 266.1 [ To Increase Payments to Creditors ] § 127.9  To Increase Payments to Creditors.

 

11  See § 266.1 [ To Increase Payments to Creditors ] § 127.9  To Increase Payments to Creditors for discussion of motions to modify a confirmed plan to increase payments to creditors.

 

12  283 B.R. 783 (Bankr. D. Kan. 2002).

 

13  See § 231.1 [ 11 U.S.C. § 1327(c): Free and Clear Effect on Liens ] § 120.4  11 U.S.C. § 1327(c): Free and Clear Effect on Liens.

 

14  See §§ 104.2 [ Lien Retention ] § 74.12  Lien Retention before BAPCPA and 231.1 [ 11 U.S.C. § 1327(c): Free and Clear Effect on Liens ] § 120.4  11 U.S.C. § 1327(c): Free and Clear Effect on Liens.

 

15  115 F.3d 521 (7th Cir. 1997).

 

16  See § 249.1 [ Can Employer Charge a Fee? ] § 125.2  Can Employer Charge a Fee? for discussion of several of those levels.

 

17  115 F.3d at 524 (emphasis added).

 

18  The Chapter 13 debtor’s exclusive right to control estate property is discussed in § 44.1 [ Debtor Has Exclusive Control of Estate Property ] § 45.1  Debtor Has Exclusive Possession and Control of Estate Property.