Chapter 13 Plans Which Vest Property of the Estate in the Debtor Too Early Can Result in Loss of Assets

05 Jun Chapter 13 Plans Which Vest Property of the Estate in the Debtor Too Early Can Result in Loss of Assets

A recent Idaho bankruptcy court decision, In re Jackson, 2009 WL 562621 (Bky.D.Idaho March 5, 2009), shows how critical it can be to correctly choose, in a chapter 13 plan, whether property of the estate should or should not vest in the debtor upon confirmation of the plan. In this case, the debtors suffered having a $19,783.03 judgment lien placed upon their home, during their chapter 13 case — the result of making the wrong choice.
Each and every chapter 13 debtor needs to choose, when filing his or her chapter 13 plan, between two different plan provisions: choice one, having property of the estate vest in the debtor upon confirmation of the plan, or choice two, having property of the estate vest in the debtor upon conversion, discharge or dismissal.
Choice one may give some debtors more latitude in selling or disposing of assets during the case, which can last up to five years. However, this can be accomplished through other means, usually by obtaining a court order; this means choice one has only marginal benefits for most debtors.
Choice two means that all property existing at the time of filing, and all property acquired during the case, remains property of the bankruptcy estate until the case is over. At that time all such property vests in the debtor. Therefore, all property is protected by the bankruptcy stay during the entire case. This offers maximum protection for most debtors.
In Jackson, the debtors chose to specify in their chapter 13 plan that property of the estate would vest in the debtor upon confirmation of the plan. After their plan was confirmed, in connection with their flooring business, the debtors incurred a substantial debt for flooring supplies. The supplier commenced suit to collect this debt, and it obtained a judgment. The supplier claimed that its judgment lien attached to the debtors’ home, which they had owned when the chapter 13 case was filed, and also that it attached to two parcels of real estate they had acquired after confirmation of their plan.
The bankruptcy court ruled that the $19,783.03 judgment lien attached to the debtors’ home, by reason of the plan provision vesting property of the estate in the debtors. However, the after-acquired real estate was protected by the bankruptcy stay; therefore the judgment lien did not attach to these two parcels.
The Jackson case illustrates the importance of making the right choice regarding when property of the estate vests in the debtor. This choice should be discussed in depth with your bankruptcy lawyer when filing your chapter 13 plan. For maximum protection, it may be wise to choose to delay vesting of property of the estate in the debtor until conversion, discharge or dismissal.
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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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