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. 9th
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.
