Chapter 13 Bankruptcy Estate and Postpetition Claims
Relevant Bankruptcy Code Sections:
- The Chapter 13 bankruptcy estate includes all property that the debtor owned on the bankruptcy filing date plus all property and income acquired between the filing date and the close, dismissal, or conversion of the case.
- All property vests with the petitioner upon confirmation of a payment plan, unless the plan provides otherwise.
- If the case is converted to Chapter 7, then only the property that the debtor owned on the filing date for the Chapter 13 case will become property of the Chapter 7 bankruptcy estate, unless the conversion was based on fraud.
- Some postpetition claims, claims that arise after the filing for bankruptcy, such as tax claims, must be paid in full and are nondischargeable.
- Creditors must obtain approval from the trustee to grant the debtor new credit; otherwise their claims will be disallowed if they should have known that they needed such approval and it was practicable, but they did not get it.
- The postpetition creditor can either file a claim or wait until the bankruptcy case is closed to collect.
- The advantage of filing an allowed claim is that the creditor gets paid during the bankruptcy, but the disadvantage is that it may receive less than the full debt and its debt will be discharged.
- If the creditor decides to not file a claim, then it will have to wait until the bankruptcy is closed, which could be up to 5 years, but it will be entitled to the full amount of its debt since it will not be discharged.
The bankruptcy estate is the total of all of the debtor's property that is used to pay the debtor's creditors. Under Chapter 7, all of the debtor's property becomes part of the Chapter 7 bankruptcy estate at the moment of filing. After subtracting property that the Chapter 7 petitioner has claimed as exempt or that the trustee has abandoned because its sale would yield little or nothing to pay creditors, what is left is what the trustee can sell or take possession of to pay creditors. Hence, the bankruptcy estate provides the funds to pay creditors. Because Chapter 7 is a liquidation, the bankruptcy estate does not include any property, with some special exceptions, or income acquired by the debtor after the bankruptcy filing date. Hence, the debtor gets his fresh start immediately, months before he actually receives a discharge.
The Chapter 13 bankruptcy estate, by contrast, not only includes all of the debtor's property at the time of filing, but also includes all property and income acquired after the commencement of the case, and before the close, dismissal, or conversion of the case.
The Chapter 7 bankruptcy estate is still relevant to the Chapter 13 filer because it determines the minimum amount of money that must be paid to his unsecured creditors in his payment plan, which is what the creditors would have received in a Chapter 7 liquidation. If the debtor cannot pay this minimum amount, then the court will either dismiss the case or convert it to Chapter 7.
The debtor remains in possession of the property, and the automatic stay protects the property and the debtor's income from any attempts by creditors to collect their debt outside of bankruptcy. However, keeping property in the bankruptcy estate may also prevent the debtor from obtaining any new credit that may be needed during the course of the bankruptcy, such as getting a car fixed to go to work.
After the confirmation of the debtor's payment plan, all property vests with the debtor unless otherwise provided in the plan. If the debtor provides that some property remain in the estate in his plan, then that property will continue to be protected by the automatic stay.
However, if the Chapter 13 case is converted to Chapter 7, then the bankruptcy estate in the converted case consists only of the property held by the debtor at the filing date for the Chapter 13 case. Income and property after the commencement of the case but before the conversion to Chapter 7 becomes part of the fresh start that allows the debtor to continue life after the bankruptcy. However, if the conversion was based on fraud, then the bankruptcy estate at the date of the conversion, including property and income acquired postpetition, becomes the bankruptcy estate under Chapter 7.
Because a Chapter 13 bankruptcy case lasts 3 or 5 years, there will be some claims that arise after the filing, most notably tax claims. Usually, the tax authorities will file a claim so that they are paid out of the debtor's plan. As a priority claim, the debtor must pay all tax claims in full—any unpaid tax claims are not dischargeable.
Another type of postpetition claim that will arise comes from new credit that the debtor needs during the course of the bankruptcy, such as obtaining a loan to fix a motor vehicle or for medical treatment. Such credit must be for property or services necessary for the debtor's performance under the plan. To protect the debtor from unwise financial decisions, the creditor must get prior approval from the trustee before the granting of credit.
If the creditor grants the debtor credit before obtaining the approval of the trustee where it would have been practicable and the claimant should have known to get such approval but didn't do so, then the creditor's claim will be disallowed. As a result, the creditor's claim will not be discharged, since only claims provided for in the payment plan are discharged, but the creditor will have to wait until the close of the bankruptcy before collecting on its claim.
Creditors with postpetition claims have 2 choices:
- Creditors can file a claim so that it is provided for in the payment plan. With this option, the creditor gets paid sooner but it may be less than the debt and its debt will be discharged at the close of the case.
- Creditors can wait until the bankruptcy is over before collecting payment, which could be several years. If the creditor waits until the bankruptcy is over, then the creditor may be able to get full payment eventually, since its debt will not be discharged, but takes the risk that it will not be paid.