Facts of the Case

Provided by Oyez

In February 2010, Charles Harris filed for bankruptcy under Chapter 13 of the Bankruptcy Code. The approved plan instructed Harris to make monthly payments to the trustee Mary Viegelahn for sixty months, as well as monthly payments directly to Chase, which held his mortgage. After the mortgage and secured creditors debts were paid off, the payments would go to Harris' unsecured creditors. In October 2010, Chase moved to lift the automatic stay of Harris' home for his failure to make the mortgage payments, and Harris moved out of his house when the stay was lifted in November 2010. At that point, Viegelahn held the portion of the monthly payments intended to go to Chase. After Harris voluntarily converted his bankruptcy case to Chapter 7, Viegelahn distributed those funds to Harris' creditors. Harris sued for that money and argued that Viegelahn had no authority to disburse funds after conversion of the case. The bankruptcy court issued an order compelling the return of the funds and the district court affirmed. However, the U.S. Court of Appeals for the Fifth Circuit reversed and held that the undistributed payments that the Chapter 13 trustee holds at the time of the case's conversion to Chapter 7 must be distributed to creditors pursuant to the Chapter 13 plan.

Questions

  1. When a debtor in good faith converts a bankruptcy case from Chapter 13 of the Bankruptcy Code to Chapter 7, are the undistributed funds held by the Chapter 13 trustee refunded to the debtor or distributed to the creditors?

Conclusions

  1. The undistributed funds should be returned to the debtor. Justice Ruth Bader Ginsburg delivered the opinion for the unanimous Court, which held that filing for Chapter 7 bankruptcy only affects the debtor’s assets from prior to the filing. Assets the debtor acquired after filing for Chapter 7 bankruptcy, as were the assets in this case, remain the property of the debtor. The Court held that Congress intended to allow a debtor to make a “fresh start” by converting a Chapter 13 bankruptcy to Chapter 7 in good faith, and therefore no penalty should be exacted in the form of requiring the disbursement of assets acquired after the filing date. Therefore, once a Chapter 13 bankruptcy is converted to a Chapter 7 one, unless the conversion is in bad faith, any assets acquired after the filing of the Chapter 13 petition revert back to the debtor.