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U.S. Supreme Court says leftover Chapter 13 funds go to debtor

In a case that will impact bankruptcy proceedings in South Carolina and nationwide, the U.S. Supreme Court has ruled that Chapter 13 bankruptcy trustees must return all undistributed funds to debtors who convert their cases to Chapter 7. The unanimous decision, which came down on May 18, resolves a question that has divided bankruptcy courts for three decades.

The case decided by the high court involved a ruling by a bankruptcy judge that a Texas man was entitled to any undistributed funds leftover when he converted his Chapter 13 bankruptcy into Chapter 7. However, the Chapter 13 trustee used the remaining $5,500 to pay off unsecured creditors, claiming she had a responsibility to "wind up" the Chapter 13 proceedings. The case then went before the U.s. Court of Appeals for the 5th Circuit, which ruled in favor of the trustee.

The Supreme Court, however, agreed with the bankruptcy judge, ruling that debtors who convert their cases from Chapter 13 to Chapter 7 are entitled to any leftover funds that were garnished after the Chapter 13 filing. The court said a debtor's post-Chapter 13 earnings do not become part of the Chapter 7 estate except in cases of bad faith, basing its holding on the 1994 revision to bankruptcy laws. The court rejected the contention that the trustee had any obligation to distribute the funds in order to "wind up" the Chapter 13 filing. The court also dismissed the argument that undistributed funds constituted a financial "windfall" for Chapter 13 debtors.

South Carolina residents who need advice about filing for Chapter 7 bankruptcy may benefit by consulting with an attorney who has experience with these matters. There are eligibility and other requirements that the attorney can explain.

Source: Courthouse News Service, "Bankruptcy Leftovers Go to Debtor, SCOTUS Says," William Dotinga, May 18, 2015

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