29 Nov After-Acquired Property in Chapter 13: Whether to Amend the Schedules is No Longer in Doubt
Debate has long raged over the question whether property acquired by a chapter 13 debtor after the initial case filing must be listed in the bankruptcy papers by amending them. Two recent appeals court cases appear to have made clear that amendment of the bankruptcy papers ismandatory when such propertyis acquired, effectively ending the debate.
Opponents of mandatory disclosure of after-acquired property have argued that section 1306 of the bankruptcy code restricts after-acquired property from becomingproperty of the chapter 13 estate, except for inheritances, life insurance proceeds and divorce court property settlement proceeds acquired in the 180 days after filing, as described in section 541(a)(5). They also point to Rule 1007(h) of the Bankruptcy Rules, which requires an amendment to the papers only to list an asset acquired in section 541(a)(5)’s 180 day post-filing window.
Despite the well reasoned nature of these arguments, courts have often sided with those advocating for disclosure of after-acquired property of any kind, at all times, which is received duringa chapter 13 case.It is now clear that the risks of non-disclosure are simply too high, and amendment to list after-acquired property is the only safe course of action for the chapter 13 debtor.
Carroll v. Logan, No. 13-1024 (4th Cir. Oct. 28, 2013), involved a chapter 13 debtor whose mother died nearly three years after the case was filed, leaving the debtor $120,000. The debtor notified the court of the inheritance, but argued that section 1306 kept the inheritance out of the bankruptcy estate.
The court of appeals disagreed, holding that section 1306 expands the estate established by section 541(a) to include any property acquired during the chapter 13 case. This included an inheritance, notwithstanding the limiting language of section 541(a)(5). The court held the more specific language of section 1306 controlled the result.
Flugence v. Axis Surplus Insurance Co., No. 13-30073 (5th Cir. Oct. 4, 2013), involved a chapter 13 debtor who was injured in a car accident three years into her chapter 13 case. A few months later, she sued for personal injury. The defendants soonasked the bankruptcy court to declare that the debtor was judicially estopped from suing the car accident defendants, due to the debtor’s failure to amend her bankruptcy papers to disclose the car accident lawsuit.
Once again, the appeals court held that the after-acquired property, in the form of the debtor’s personal injury lawsuit, was property of the bankruptcy estate. The court observed that the type of chapter 13 plan filed in the case provided that property of the estate would vest in the debtor only at the end of the case. However, the court went on to say that its holding would have been the same even if the plan had vested property of the estate in the debtor at plan confirmation. In either plan scenario, the trustee or creditors were entitled to be informed of the lawsuit, in order to argue that the lawsuit should be factored into the chapter 13 plan. By failing to amend the bankruptcy papers, the debtor had wrongly deprived the other parties of knowledge of the lawsuit.
The result in Flugence was that the debtor was judicially estopped from pursuing her lawsuit against the car accident defendants, due to her failure to amend the bankruptcy papers to list the lawsuit as an after-acquired asset.
In the wake of Carroll and Flugence, we are left with appeals court rulings that an inheritance, and a personal injury lawsuit, areproperty of the chapter 13 estate no matter whenthey are acquired. Carroll implies that such an asset must be disclosed by amending the bankruptcy papers, and Flugence specifically holds that such disclosure is required. For most, if not all, bankruptcy practitioners, these two cases taken together spell the end of the arguments that after-acquired property may not have to be disclosed by amending the chapter 13 bankruptcy papers.
Image used by permission, jorgophotography – Fotalia.com.
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