Post-Petition Property in Chapter 13
People spend between three and five years in Chapter 13 bankruptcy, paying back creditors in whole or in part, curing mortgage and tax defaults, and accomplishing the many other things that Chapter 13 allows a person to do while reorganizing. Due to the length of the journey, at times an issue arises when a debtor has the good fortune to be the recipient of some extra money during the case. It usually doesn't come up, but what happens when it does?
Well, first of all there is a difference in bankruptcy between property and income. The "best interests" test deal with property, and essentially says that creditors in a Chapter 13 should get what they would have gotten had the case been filed under Chapter 7. So, to check this test, one looks at the property, real or personal, tangible or intangible, of the debtor when the case was filed and nets out exempted property and hypothetical trustee fees and expenses. The result of this math is the minimum money that unsecured creditors get under a Chapter 13 plan.
Moving on, income is the focal point of the "best efforts" test in Chapter 13. The nuts and bolts of this get complicated and sometimes involve a means test, but the basic gist is that debtors must pay in their plan what's left over during their stay in Chapter 13 after they pay their essential bills.
So let's imagine your aunt gives you $50,000 while you're in a Chapter 13 bankruptcy. Is that income or property? The answer is that it's both, but the more relevant question is how does it fit in with the two tests mentioned above. First, we are assuming that this windfall comes to the attention of the court through the trustee or your own lawyer. In practice, this often doesn't happen because people don't always share good news. However, let's assume that the matter does come to the Chapter 13 trustee's attention and there is a motion to modify your plan filed under Section 1329 of the Bankruptcy Code to increase the amount of your payout to your creditors.
First of all, it is improper to re-do the best interest test by factoring in the gift money like it existed on the filing date. It didn't, and that new money has nothing whatsoever to do with what creditors would have received in a hypothetical Chapter 7 case. Some Chapter 13 trustee's will ask for money on this basis, but it doesn't stand much of a chance if you have a reasonably informed lawyer. What about the best efforts test?
This is more murky. Ever since the United States Supreme Court stated in Lanning that 11 U.S.C. 1325(b) was only a starting point for determining projected disposable income in a Chapter 13 case, the door has been open slightly wider for trustees to argue that a debtor with unexpected income should just pay more based on fairness. However, the trustee should not prevail in such an attempt when faced with knowledgeable and determined opposition. That is because the best efforts test is a test for confirming a plan. Once a plan is confirmed, it can only be modified under Section 1329 of the Code. That section does not make compliance with the Section 1322(b) "best efforts" test a requirement. See, e.g., IN RE COAY, Bankr.CD Ill. (2012). The bottom line is that this is an area in which a debtor's attorney really proves their value by knowing the law and being ready to fight a trustee's request for more money than they are legally entitled to obtain.
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