Chapter 13 Treatment of Sale Proceeds; Sections 541, 1306

What happens to post confirmation proceeds from the sale of assets vested in the debtor while in a Chapter 13 bankruptcy? Is the debtor able to keep the proceeds, or do they become property of the bankruptcy estate?

In analyzing this question, we begin by looking at the relevant section of the bankruptcy code, which are § need to look at competing sections of the bankruptcy code; most notably 11 USC §§ 541, 1306. Section 541 states “all legal or equitable interests of the debtor in property as of the commencement of the case” and “[p]roceeds, product, offspring, rents, or profits of or from property of the estate.” This is clarified within Chapter 13 cases, as § 1306 states “in addition to the property specified in § 541”, the bankruptcy estate includes all property “of the kind” specified within § 541 “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted...whichever occurs first.” 11 USC § 1306(a).

To summarize, the above code sections state property of the estate is all property the debtor (1) owns on the date the petition is filed and (2) acquires while the chapter 13 case is pending.

So, if property revested with the debtor upon confirmation is sold, what happens to the proceeds from the sale?

Fortunately, we have some guidance from In re Baker, 620 B.R. 655, 663-64 (Bankr D. Colo. 2020) wherein the court list 5 approaches. The approaches are as follows:

(1) Estate Termination Approach. The court concluded § 1327 vest all property in the debtor at confirmation, therefore the chapter 13 estate terminates at confirmation except as provided for in the debtor’s chapter 13 plan. In re Jones, 420 B.R. 506, 512-13, 515 (B.A.P. 9^th Cir. 2009).

(2) Estate Preservation Approach. In this approach, the estate continues after confirmation, retains all pre-confirmation property, and includes any property acquired by the debtor after confirmation. In re Clouse, 446 B.R. 690, 700 (Bankr. E.D. Pa. 2010).

(3) Conditional Vesting Approach. This is a hybrid approach. Property is simultaneously property of the debtor and property of the estate. Section 1327 gives the debtor “an immediate and fixed right to the future enjoyment of the bankruptcy estate” after the debtor “has faithfully completed his obligations under the plan and is entitled to a discharge.” Woodard v. Taco Bueno Rests., Inc., No. 4:05-CV-804-Y, 206 WL 3542693.

(4) Estate Transformation Approach. The “estate consists of the property and future earnings of the debtor dedicated to fulfillment of the Chapter 13 plan.” This approach does not take into consideration when the property was acquired. In re Root, 61 B.R. 984, 985 (Bankr. D. Colo. 1986).

(5) Estate Replenishment Approach. Pre-confirmation property becomes property of the debtor at confirmation, while post-confirmation property becomes property of the estate. In re Fisher, 203 B.R. 958, 962-63 (N.D. Ill. 1997).

Hopefully this gives you an overview of approaches the courts consider when deciding on how to treat sale proceeds of active Chapter 13 bankruptcies.  These approaches tend to be the bases for courts coming up with their own and sometimes unique approach.  So, if you are thinking of selling an asset in your Chapter 13, make sure to check with a competent bankruptcy attorney in your area to understand the effects of the sale.