« Shareholders in Chapter 11 Cases | Main | Nortel: More Universalist Than Not »

Postpetition Wages Held by Chapter 13 Trustee Belong to Debtor Upon Conversion

posted by Pamela Foohey

In case you haven't seen it, the SCOTUS issued its unanimous opinion in Harris today, holding that postpetition wages held by the Chapter 13 trustee at the time a case is converted to Chapter 7 must be returned to the debtor. When the Fifth Circuit issued its decision that created the split with the Third Circuit, I blogged some thoughts, primarily focusing on statutory analysis. Now that the SCOTUS has weighed in, the practical question is: how can creditors protect themselves from the risk that the trustee will accumulate a large sum of postpetition wages? Today's opinion ends with that question and notes that the amount of postpetition wages a particular Chapter 13 trustee will be holding at the time of conversion will depend upon the practices of that trustee. In addition, as in the case before the Third Circuit, sometimes Chapter 13 trustees accumulate funds because creditors refuse to receive plan payments for whatever reason.

Today's opinion suggests that creditors can include a disbursement schedule in the Chapter 13 plan. The Third Circuit's opinion sets out a few other ideas (see fn 9), including requesting plan modification if a creditor is refusing to accept payments. Perhaps the most effective protection suggested by the Third Circuit is for the plan to provide that payments vest in creditors immediately upon receipt by the Chapter 13 trustee, and to include similar language in the order confirming the plan. The Third Circuit, however, explicitly noted that it was not ruling on whether such language would remove accumulated undistributed payments from revesting with the debtor upon conversion. Today's opinion notes that a plan that provides that payments are property of the estate (as the plan provided in Harris) does not change the outcome that undistributed postpetition wages revest with the debtor upon conversion. But that still seems to leave creditor vesting language as a potential way for creditors to protect themselves.


Though the Supreme Court does reference such a schedule, I am not sure how a Creditor (or a Court) can require it.

A Creditor cannot propose a plan. They could object saying a disbursement schedule should be included, but is it bad faith to not include a specific distribution schedule? I'm not sure how it would be. And if it's not, and other requirements are met, the Court "shall" confirm the plan.

A Motion to Modify may be helpful if a secured creditor refuses payments in order to foreclose, in that the moving party could seek for the amount paid on the arrearage to be reduced to the amount paid to date, but that would require way above the ordinary tracking by unsecured creditors [a secured creditor cannot move to modify].

Frankly, I am not sure how a Trustee can be compelled to distribute money to other creditors (absent modification). If the plan says to pay $10,000 on an arrearage, $4,000 is paid, and the Creditor is refusing funds, the Trustee still has to abide by the plan. The Trustee cannot, on their own, decide that other parties should get $6,000 more [in a pay what is left over plan, where the claim comes in $6,000 below the listed amount, I think the Trustee can, but that's a different scenario]. A Court is not going to compel a Trustee to ignore the plan and just send money elsewhere.

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.