What is Property of the Estate When a Case Converts from Chapter 13 to Chapter 7?

30 Dec What is Property of the Estate When a Case Converts from Chapter 13 to Chapter 7?

Frequently, cases in bankruptcy are converted from one chapter to another. Most commonly, is the conversion from Chapter 13 to Chapter 7. More and more chapter 13 cases are converting as a result of debtors realizing that it simply makes no economic sense to save their home in Chapter 13 in light of the deflating real estate market.

So upon conversion, what does the bankruptcy estate consist of? Luckily, there is a Bankruptcy Code section that specifically addresses estate property upon conversion. 11 USC 348 provides in pertinent part as follows:

(1) Except as provided in paragraph (2), when a case under chapter 13 of this title is converted to a case under another chapter under this title– (A) property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion;

What this means is that the new Chapter 7 estate only consists of that property left from the original Chapter 13 filing date remaining in possession or control of the debtor. In other words, the Chapter 7 estate is almost always composed of less property than what existed in the original Chapter 13 filing. This is because of two reasons:

1) During the lifetime of the Chapter 13 case and prior to conversion, property is depleted from the Chapter 13 estate and/or depreciates. Food and other perishables no longer exist. Some assets may have been sold. Cars break down, property is given away or donated, and other items simply break and are thrown away.

2) All new assets acquired during the Chapter 13 case are not part of the estate. New clothing, furnishings, and other personal assets are specifically excluded from the Chapter 13 estate since they are post petition assets. An extreme example would be winning a lottery and then converting to Chapter 7. The lottery winnings are not part of the Chapter 7 estate under the definition above. However, conversion in such a case may bring up the “bad faith” exception.

11 USC 348 states “except as provided in paragraph (2)…..” Paragraph (2) in turn provides:

(2) If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.

So in the Lottery example above, it appears a strong argument might exist for bad faith in light of the fact that the lottery winnings could now pay off all the creditors. If bad faith is then found, property of the Chapter 7 estate would then consist of property of the estate on the date of conversion, which would include all post petition acquisition of property still in possession or control of the debtor, including the Lottery winnings.

Interestingly, however, is that this statute uses the words “property of the estate.” Depending upon which jurisdiction you are in, confirmation sometimes removes property of the estate under 11 USC 1327 ( Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor). So technically even a bad faith conversion may protect those lottery winnings!

Bottom line, always consult your attorney first over 11 USC 348 if contemplating to convert. The last thing you want to happen is to lose property because of a bad faith conversion or because of a trustee unaware of the meaning of 11 USC 348.

Written by Michael Doan

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