Can I Receive a Refund if My Chapter 13 Bankruptcy Case Is Dismissed?

 Posted on January 27, 2022 in Bankruptcy

People who are struggling to repay the debts they owe may be able to receive relief by filing for bankruptcy. While there are different types of bankruptcy that may apply in different situations, Chapter 13 bankruptcy is usually the preferred option for those who wish to avoid losing their homes or other property they own. However, these debtors will be required to make ongoing monthly payments in a repayment plan that will last from three to five years. If they experience financial difficulties that cause them to be unable to make payments, their bankruptcy case may be dismissed. In these situations, debtors may wonder about the money that they already have paid into the repayment plan and whether some of these payments may be refunded to them.

Procedures Followed During the Dismissal of a Chapter 13 Case

If a Chapter 13 bankruptcy is dismissed, bankruptcy protections will no longer apply, and creditors may take action to collect debts owed by the debtor. In some cases, a debtor may choose to convert their case to a Chapter 7 bankruptcy and receive a discharge of their outstanding debts. However, this raises the question of what will happen to funds that were paid to the trustee in the Chapter 13 case but had not yet been distributed to the creditors in the repayment plan. 

Section 349 of the U.S. Bankruptcy Code states that a dismissal of a Chapter 13 bankruptcy “revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.” This indicates that funds paid to a trustee that were not distributed to creditors before the dismissal of the case should be returned to the debtor. However, the trustee may deduct administrative fees before returning the funds.

This issue was addressed in a 2015 Supreme Court case. In that case, a debtor had been making payments in a Chapter 13 plan, with some of the amount being used to pay their mortgage debt and the rest of the funds being used to pay other creditors. When the debtor defaulted on their mortgage, the mortgage lender foreclosed on their home, and the trustee stopped making payments toward the mortgage debt. This caused over $5,000 to accumulate in the trustee’s possession. When the debtor chose to convert their case to a Chapter 7 bankruptcy, the trustee distributed the money that had accumulated to the other creditors.

The debtor argued that the accumulated money should have been refunded, and after reviewing the case, the Supreme Court agreed. In its ruling, the Supreme Court stated that unless a debtor acts in bad faith when converting a Chapter 13 bankruptcy to a Chapter 7 bankruptcy, such as by concealing assets, they should be able to keep their post-petition earnings. Since a case will proceed as if the person had originally pursued a Chapter 7 bankruptcy, any wages earned after filing for bankruptcy should be shielded from creditors, including the portion of those wages that were put toward a Chapter 13 repayment plan.

Contact Our San Antonio Bankruptcy Dismissal Lawyer

Determining how to proceed with the bankruptcy process if you are struggling financially can be difficult, but you may have options to avoid the dismissal or convert a case from Chapter 13 to Chapter 7. The Law Offices of Chance M. McGhee can advise you of your options, and we will provide you with representation to ensure that you can address your debts successfully. Contact our New Braunfels bankruptcy conversion attorney at 210-342-3400 to arrange a complimentary consultation today.

Sources:

https://casetext.com/case/harris-v-viegelahn-1

https://www.law.cornell.edu/uscode/text/11/349

https://www.law.cornell.edu/uscode/text/11/1326