What Happens to Chapter 13 Payments if Bankruptcy Case Converted or Dismissed?

What Happens to Chapter 13 Payments if Bankruptcy Case Converted or Dismissed?

In Chapter 13 bankruptcy in Arizona, you make regular monthly payments to a trustee in a fixed amount for a period of usually 36 or 60 months. The first plan payment is made 30 days after the filing date and is based upon a debtor’s projected budget completed on their bankruptcy schedules. The Chapter 13 trustee escrows these monthly payments only to be distributed to creditors in amounts and priorities set forth in a Chapter 13 plan. These Chapter 13 payments if bankruptcy case is converted or dismissed are of great importance to individual debtors.

In some circumstances, you may want to dismiss your Chapter 13 bankruptcy or convert it to Chapter 7 proceedings. Some of the reasons for doing this include that a debtor is unable to afford Chapter 13 plan payments, has lost their job, or that the reason for filing was to benefit from the automatic stay to stop a foreclosure and perhaps a modification was worked out with the lender. If this is the case, you will want to know what will become of the funds escrowed by the Chapter 13 trustee. What happens to Chapter 13 payments if bankruptcy case is converted or dismissed? Most are be surprised to learn that the undisbursed funds are in most circumstances returned to the debtor both in a conversion or a dismissal. The Chapter 13 trustee is not required to send it to your creditors and usually must return the funds to you.

What Happens to Chapter 13 Plan Payments if Converted?

When you convert from a Chapter 13 case to Chapter 7 proceedings, the Chapter 7 estate includes all property listed on the day you filed the Chapter 13 case that still remains in your possession or control on the date of conversion. The United States Supreme Court has ruled in a written opinion that a debtor who converts to Chapter 7 is entitled to the return of any funds not yet distributed by the chapter 13 trustee. This means that the money that the Chapter 13 trustee is escrowing that has not yet been distributed to your creditors is not part of the Chapter 7 estate and is returned to the debtor to keep and use as they desire. Therefore, Chapter 13 payments if bankruptcy case is converted or dismissed are returned to the debtor.

One important exception to this, however, is that if the bankruptcy court finds that you converted your case in bad faith, then the Chapter 7 bankruptcy estate upon conversion includes not just the property on the date you filed the original Chapter 13 case that remains in your possession or control on the date of conversion, but also any property acquired after you filed the Chapter 13 but before conversion to a Chapter 7 case. Likewise, it may also be possible that a nondischargeable tax claim could seek to levy these amounts from the Chapter 13 trustee, much like they can in if a Chapter 13 case is dismissed. This can happens with priority tax claims. Likewise, professionals may be able to make a claim to those funds such as your attorney.

What Happens to Chapter 13 Plan Payments if Case is Dismissed?

If your Chapter 13 case is dismissed, funds held by the Chapter 13 trustee that are not yet distributed will be returned to the debtor much like in a conversion situation. Chapter 13 payments if bankruptcy case is converted or dismissed are returned to the debtor. However even moreso than in a converted case, they are subject to levy by the IRS or state or local taxing authorities since there is no automatic stay like there is in a converted case. Likewise, it could arguably be subject to a writ of garnishment from a judgment creditor. It is rare that this would happen but it is possible. Lastly, an attorney with unpaid professional fees could seek approval for payment from these undistributed funds. Chapter 13 trustees in Arizona usually hold the funds for 30 days for any IRS levy or professional claim and if no claims are made, they are returned to the debtor.

If you have questions about bankruptcy including conversion from Chapter 13 bankruptcy to Chapter 7, call the Barski Law Firm at 602-441-4700. Our firm has handled hundreds of bankruptcy cases including numerous conversions from Chapter 13 to Chapter 7. We have the experience and compassion to help you.

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