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If My Chapter 13 is Dismissed, Who Gets the Money?

Posted on Apr 17, 2014 in Chapter 13

Recently, the district court for the Northern District of Illinois ruled on one of the important unresolved issues in chapter 13 bankruptcy: If a chapter 13 bankruptcy is dismissed, what happens to money that the chapter 13 trustee is holding when the case is dismissed? The district court decided that the funds held by the trustee belong to the debtor, and the trustee needs to return the money to the debtor.

I had the privilege of representing the debtors before the bankruptcy court. They had fallen behind in their payment obligations to the chapter 13 trustee, and then came current. They decided, thereafter, not to pursue their bankruptcy case any further. But the trustee had the money they’d paid to catch up. At the time of dismissal, the trustee was holding over $16,000. As their counsel, I wanted my clients to get their money back. The trustee, diligently endeavoring to maximize the creditors’ return, wanted to disburse the funds to their unsecured creditors.

My firm and I undertook this endeavor on their behalf for free. Seeking to advance the law – and help our clients retain a ton of dough – we chose to pursue this litigation against the trustee entirely pro bono.

This is a close legal question, but at the end of the day, the bankruptcy court – and now the district court – reached the right result, and ordered that the trustee should return the funds held at the time the case was dismissed.

Technically speaking, under section 349(b)(3) of the bankruptcy code, a dismissal order revests property of the bankruptcy estate in the entity in which such property was vested before the commencement or filing of the case. Here, since the Trustee hadn’t yet paid to creditors the funds that my clients had paid to her, the funds belonged, post-dismissal, to my clients.

This is an important unresolved issue in chapter 13 debtor practice. The bankruptcy court opinion has already been cited in several other cases and jurisdictions – in the Middle District of Tennessee and the Eastern District of Pennsylvania, for example.

The crux of chapter 13 is a repayment plan that can last up to five years. It’s messy enough merely in theory, before one ever gets to the practice. (Imagine all the things that can happen to someone’s life and finances over the course of five years!) Once one gets to the practice, one quickly learns how often very smart people can disagree. So it’s always nice when, in some small way, I might be helping my colleagues and my clients get a little more clarity, not to mention helping my clients keep a lot more of their money.


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