Payments held by Chapter 13 Trustee

When a debtor’s Chapter 13 bankruptcy case is terminated early, the first question asked is, “What happens to my money that the trustee is holding?” The answer depends on whether the Chapter 13 plan was confirmed prior to a dismissal, or whether the case is converted to a Chapter 7.

Unconfirmed Chapter 13 Case

If the debtor’s Chapter 13 Plan was not confirmed prior to dismissal, money held by the trustee is returned to the debtor. After the dismissal of the Chapter 13 case, the trustee makes an accounting, and pays trustee’s fees, attorney fees and/or adequate protection payments to creditors. Any remaining money is generally returned to the debtor. See In re Stamm, 222 F.3d 216 (5th Cir. 2000)(holding that when a Chapter 13 case is converted to Chapter 7 before confirmation of a plan, wages paid by the debtor to the trustee under the proposed plan do not become part of the Chapter 7 estate and must be returned to the debtor).

Confirmed Chapter 13 Case

If the debtor’s Chapter 13 Plan was confirmed prior to the dismissal of the case, there is a split of opinion on where the money goes. The Third Circuit Court of Appeals directs the trustee to return undistributed money to the debtor. See In re Michael, 699 F.3d 305 (3rd Cir. 2012). Conversely, the Fifth Circuit Court of Appeals states the right of creditors to money paid to the trustee under direction of a confirmed plan is superior to the debtor’s. See Viegelahn v. Harris (In re Harris), No. 13-50374 (5th Cir. July 7, 2014). In the Fifth Circuit, the trustee may pay creditors after he case is converted. These funds are generally not property of the Chapter 7 bankruptcy estate (see below).

Dismissed Case

If the debtor’s Chapter 13 Plan is dismissed by the bankruptcy court after the case was confirmed, any money held by the Chapter 13 trustee is returned to the debtor. See 11 U.S.C. § 349(b)(3)(dismissal generally revests the property of the estate in the debtor); see also In re Nash, 765 F.2d 1410 (9th Cir. 1985) (holding that any undistributed earnings paid to a Chapter 13 trustee pursuant to a confirmed plan must be returned to the debtor upon dismissal of the Chapter 13 case).