When a debtor’s Chapter 13 bankruptcy case is terminated early, the first question asked is, “What happens to my money 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.
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 returned to the debtor at least fourteen (14) days after the court enters the Order of Dismissal.
If the debtor’s Chapter 13 Plan was confirmed prior to the dismissal of the case, any money received by the trustee prior to the entry of the Order of Dismissal is disbursed to creditors pursuant to the Order Confirming Plan; any moneys received by the trustee following the entry of the Order of Dismissal is returned to the debtor after fourteen (14) days.
If the debtor’s Chapter 13 case is converted (either by motion of the debtor or by the court) to a case under Chapter 7, any money held, less the trustee’s fees, attorney fees and/or adequate protection payments is returned to the debtor or forwarded to the Chapter 7 trustee pursuant to the Order Converting. In general, if the Chapter 13 debtor converts to Chapter 7, only the debtor’s property as of the filing date becomes property of the Chapter 7 bankruptcy estate. Any property acquired after the filing of the Chapter 13 case, but before the conversion to Chapter 7 is excluded as long as the debtor converted in good faith. Consequently, in most situations the debtor will receive a refund of the balance of the payments.
Bankruptcy law is complicated and full of what my high school English teacher called “non-sequiturs” (from Latin meaning “it does not follow”). Common sense says that if the Chapter 13 trustee already has your money to pay your creditors, he just shuffles it over to the Chapter 7 trustee, right? But Congress and the bankruptcy courts have directed otherwise, providing many debtors with a much-needed windfall when converting from Chapter 13 to Chapter 7.