Converting a Bankruptcy Case
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Funds held by the chapter 13 trustee are the post-petition property of the debtor. Therefore, will be returned to the debtor. Unless, the funds were derived from pre-petition assets or pre-petition tax refunds. In that case those funds will be surrender to the chapter 7 trustee. Section 348(f)
In re Hodges, No. 13-361 (E.D. Tenn. Sept. 29, 2014) Equity created by payments into a chapter 13 plan belongs to the debtor upon conversion to chapter 7. Hodges involved a tug-of-war between the debtor and the trustee over equity in the debtor’s residence that was created by the debtor’s payments into his chapter 13 plan prior to conversion. The district court affirmed the bankruptcy court’s order that the equity belonged to the debtor and that the trustee must abandon the property.
The Third Circuit in In re Michael, 2012 U.S. App. LEXIS 22244 (3d Cir. Oct. 26, 2012), ruled for the debtor on the issue of whether the chapter 13 trustee had to turn over to the debtor funds that the trustee was holding when the debtor converted from chapter 13 to chapter 7 after confirmation of the plan. Rejecting the trustee’s position, which was supported by an amicus brief filed by all the chapter 13 trustees in the circuit, the court held that the trustee could not distribute the funds to creditors. The court reasoned that the conversion ended the chapter 13 trustee’s services and vacated the order confirming the plan. It also found that the legislative history of section 348(f) supported the conclusion that Congress did not intend for the debtor to have the disincentive to filing chapter 13 that would be caused by the risk that filing a chapter 13 case could cause the loss of postpetition property if the debtor later had to convert to chapter 7.
In re Salazar, No. 08-11597-JMM, BAP No. AZ-11-1551-DJuPa Because the Salazars had spent the prepetition tax refund in good faith to pay ordinary and necessary living expenses during the period from the petition date to the conversion date from 13 to chapter 7, the plain meaning of the language used in § 348(f)(1)(A) excluded the Prepetition Refund from property of the chapter 7 estate. We AFFIRM the bankruptcy court’s order denying the Trustee’s motion to compel turnover of the Prepetition Refund. See also Bogdanov v. Laflamme (In re Laflamme), 397 B.R. 194 (Bankr. D.N.H. 2008.
APPRECIATION IN VALUE POST FILING CHAPTER 13: In re Lynch, 363 B.R. 101 (B.A.P. 9th Cir., 2007). held that appreciation in value of property during ch 13 does not belong to ch 7 trustee upon conversion unless conversion in bad faith. The value is determined as of the filing date of the 13. However, Lynch disagreed with Niles regarding whether the 7 trustee is bound by the debtor’s values in the 13 schedules. Lynch holds the 7 trustee can have a hearing to determine the value as of the filing of the ch 13. See also In re NILES,342 B.R. 72 (D.AZ March 28, 2006.) The Court concludes that the funds in excess of the exemption amount received as a result of the postconfirmation, preconversion sale of Debtor’s home are not subject to turnover to the Trustee.
In re Sobczak, 369 B.R. 512 (9th Cir. BAP 2007). In a case arising out of Arizona, the BAP reversed the Bankruptcy Court’s dismissal of the debtor’s case, holding that (a) the debtor in a case converted from Chapter 7 to Chapter 13 had standing to move for dismissal of his bankruptcy, but (b) dismissal of the debtor’s bankruptcy in the circumstances presented was improper. The BAP found that the debtor’s realization that in bankruptcy he was limited by §522 to Ohio’s $5,000 homestead exemption, rather than the Arizona $150,000 exemption that would apply if he were not in bankruptcy, was not a proper basis for allowing the debtor to move under §1307 to dismiss his case.
A debtor’s right to convert from Chapter 7 to 13 is at least presumptive (with the burden on the party opposing conversion), and some courts (reviewing the legislative history) view it as absolute (assuming that the debtor is eligible for relief under that chapter and the case had not previously been converted). For a discussion, see In re Condon, 358 BR 317 (6th Cir. 2007)(stating that debtor’s conduct must be egregious to warrant denial of conversion) and/or In re Marrama, 430 F.3d 474 (1st Cir. 2005)(concluding that the bankruptcy court could deny the debtor’s motion if it found that the debtor engaged in bad faith conduct).
In re Ronald C. Markovich, BAP No. MT–95–2298–RyJR. Bankruptcy No. 95–50151–7. (9th Cir, March 28, 1997) After debtor obtained discharge in his Chapter 7 case, and creditor subsequently obtained nondischargeability judgment, debtor moved to vacate discharge and to convert case to Chapter 13. The Bankruptcy Court, John L. Peterson, Chief Judge, denied motion, and debtor appealed. The Bankruptcy Appellate Panel, Ryan, J., held that: (1) debtor lacked standing to vacate discharge order under statute allowing only certain specified parties to seek to revoke discharge, and (2) bankruptcy court did not have inherent equitable power to revoke Chapter 7 discharge outside statutory framework.