5th Circuit: Undistributed chapter 13 money goes to creditors

J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
Posted on Jul 09, 2014

This 5th Circuit court decision sets up a "circuit split" such that the U.S. Supreme Court may have to resolve this issue some day.

In this case, the Debtor filed a Chapter 13 bankruptcy, and paid regular payments from his wages to the trustee under a confirmed Chapter 13 plan. He failed to pay some of the payments on his house, and the stay was lifted and it was foreclosed upon. Viegelahn v Harris, 5th Circuit 2014.

The debtor continued to pay the trustee the same chapter 13 payments, which accumulated to $5500 or so. After several months he converted his case to Chapter 7 bankruptcy, and the chapter 13 trustee distributed the money to creditors. The debtor filed a motion asking the court to order the chapter 13 trustee to give the money back.

At issue was whether the undistributed payments held by the Chapter 13 trustee at the time of conversion to chapter 7 should be returned to the debtor or distributed to creditors under the Chapter 13 plan. The 5th Circuit Court of Appeals concluded that the creditors' claim to the undistributed funds is superior to that of the debtor. Accordingly, the payments must be distributed to creditors in this case.

It's a different result if your chapter 13 case has not been confirmed yet; the Bankruptcy Code says that you should get the funds back, with certain exceptions. It may also be a different result if you dismiss your case instead of converting to chapter 7, that question was not at issue in this opinion.

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