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3rd Circuit: Bankruptcy trustee must return money upon conversion

A bankruptcy trustee was required to return money acquired post-petition upon the conversion of the debtor’s plan from Chapter 13 to Chapter 7, the 3rd Circuit has ruled in affirming judgment.

The debtor filed for Chapter 13 protection and obtained confirmation of a reorganization plan that called for monthly payments for distribution to creditors and regular mortgage payments outside the plan. To fund the plan, the debtor agreed to have his wages attached and paid directly to the trustee.

After the debtor failed to make his mortgage payments and faced foreclosure, he converted his case to Chapter 7. In addition, the debtor sought the return of $9,100 that had accumulated with the trustee by virtue of the wage attachment order.

The trustee objected, arguing that the money should be distributed pro rata to unsecured creditors as provided by the plan.

But the court held that the trustee must return the money to the debtor.

“Because § 1327(b) [of the Bankruptcy Code] vests all property of the Chapter 13 estate in the debtor, including any post-petition property held by the Chapter 13 trustee at the time of conversion (such as funds transferred to the estate for eventual distribution to creditors), on conversion property of the Chapter 13 estate usually is ‘under the control of the debtor.’ And because §348(a) establishes that conversion does not change the effect of the Chapter 13 petition‘s filing, the Chapter 7 petition date is deemed to be the same date that the debtor began the Chapter 13 case. Hence property acquired post-petition that is in the Chapter 13 estate at the time of conversion is not property of the new Chapter 7 estate. Rather, the debtor retains a vested interest in the property, and thereby the property reverts to the debtor on conversion,” the court said.

U.S. Court of Appeals, 3rd Circuit. In re Michael, No. 11-1992. Oct. 26, 2012.

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