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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.

Comments

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.

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