Supreme Court Rules in Favor of Debtors in Bankruptcy Conversions

Brandon, FL (Law Firm Newswire) September 30, 2015 – A recent U.S. Supreme Court decision is good news for Chapter 13 bankruptcy filers who convert their cases to Chapter 7.

Chapter 13 bankruptcy allows debtors with regular income to reorganize their debts and make regular, manageable payments on them under a court-approved plan. However, many such cases are never completed. Bankruptcy attorney O. Reginald Osenton explains why.

“Often, the debtor is eventually unable to make the payments,” Osenton said. “Other times, the issue that caused the individual’s financial trouble goes away. In the former case, the debtor’s next step often is to convert their case from Chapter 13 to Chapter 7 liquidation.”

The court-appointed trustee in a Chapter 13 case is in charge of administering the repayment plan. To that end, the debtor makes payments to the trustee, who then disburses the funds to the creditors. Sometimes, a debtor converts his case from Chapter 7 to Chapter 13 at a point in time when the trustee has received funds, but has not yet disbursed them. Who does the money belong to at that point? That was the question before the Supreme Court in the case of Harris v. Viegelahn.

The unanimous opinion of the Court was that the money still belongs to the debtor and should be returned to him or her. Further, the Court rejected the Fifth Circuit Court’s argument that this would represent a “windfall” for the debtor. The Justices reasoned that the money would belong to the debtor if he or she had filed for Chapter 7 in the first place. They also suggested that creditors try to avoid Chapter 13 plans that do not call for regular disbursement of funds from trustees.

“This ruling represents a small but important step to keep bankruptcy proceedings fair,” Osenton said.