Must a Chapter 13 Debtor Report Property Received During the Case?

08 Oct Must a Chapter 13 Debtor Report Property Received During the Case?

A chapter 13 case can last up to to five years — a long time. What happens when the debtor receives a windfall while the chapter 13 case is pending? What if the debtor wins a $50,000 lottery payout, or inherits an interest in a house owned by a long lost relative? Is the debtor required to amend his or her chapter 13 plan, or more fundamentally, must the debtor amend his schedules to list the newly acquired property as an asset?

The debtor may have concerns about amending the schedules, thinking (probably correctly) that upon learning of the new asset, the trustee might request that the debtor use the newly acquired cash, or the proceeds of selling the newly acquired asset, to make additional chapter 13 payments. If this happens, the debtor could lose the entire benefit of having received the new asset.

As noted above, the threshhold question is whether the debtor has a duty to amend the bankruptcy schedules, or to otherwise inform the trustee of the new asset. In some federal court districts, the standard form chapter 13 plan contains boilerplate language requiring that the debtor report after acquired property to the trustee during the entire term of the case. Because the provisions of a confirmed plan are binding on the debtor (and all parties to the case), in such districts the debtor clearly must amend the schedules, or otherwise undertake to notify the trustee of an asset acquired during the chapter 13 case. This is true even if the debtor fears losing the asset through the trustee asking the court to modify the chapter 13 plan.

However, in most court districts, the standard chapter 13 plan form is silent about the issue of money or property obtained as a windfall during a chapter 13 case. In these districts, the bankruptcy code and rules govern the result.

Federal Rule of Bankruptcy Procedure 1007(h) states that within ten days of learning of the existence of an after-acquired asset that would be property of the estate under section 541(a)(5) of the bankruptcy code, the debtor must formally amend the schedules to list the asset. Section 541(a)(5) defines an after-acquired asset as being property of the estate only if (1) the debtor becomes entitled to receive it within 180 days of the date the case was filed, and (2) the debtor acquires it through inheritance, life insurance death benefit, or a divorce proceeding.

This means that in federal court districts where the plan is silent on such matters, the debtor has no duty to report an after-acquired asset received during a chapter 13 case, unless the right to receive it arises within 180 days of filing, and the property is the kind specified above. However, it may be prudent for the debtor to refrain from spending or otherwise dissipating an after-acquired asset, even if he or she is confident that such an asset is not property of the estate and does not need to be reported. This way the debtor will have access to the asset, or to its cash proceeds, in the unlikely event that the trustee discovers the existence of the asset and obtains a court order concerning its disposition.

There are cases which hold that after-acquired assets must be scheduled in a chapter 13 case, with no exceptions. Their existence may indicate that amending the schedules during a chapter 13 is always prudent. If you experience this situation, consult your bankruptcy lawyer about whether the schedules ought to be amended.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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