If a chapter 13 debtor unintentionally fails to disclose an asset, the debtor keeps the asset if it was discovered after discharge and the completion of plan payments, according to Bankruptcy Judge Janet E. Bostwick of Boston.

In her opinion on August 13, Judge Bostwick was deciding three cases together. The three chapter 13 debtors had personal injury claims of which they were unaware when they filed their petitions. Consequently, the claims were not scheduled or disclosed.

All three debtors confirmed their plans and received discharges after the completion of plan payments. Under the local practice in Boston, estate property did not revest in the debtors until the debtors received their discharges.

In two cases, the chapter 13 trustee learned about the personal injury claims five years after the debtors had received their discharges. In the third case, the chapter 13 trustee got wind of the claim 10 years after discharge. The trustee conceded that the debtors were unaware of the claims while they were in chapter 13, and the debtors admitted that the unknown personal injury claims were estate property.

The trustee filed motions to reopen the cases and convert them to chapter 7 so that the chapter 7 trustees could administer the claims. The debtors opposed and won.

Revesting of Assets

Judge Bostwick set out the differences about estate property and the sources of distributions to creditors in chapters 7 and 13. Compared to chapter 7, she said that “the source of distributions to creditors [in chapter 13] is the payments under the plan,” and payments “under a plan are determined primarily by the debtor’s disposable income.” Still, she said that the court in chapter 13 “must consider the value of the debtor’s nonexempt assets in confirming a plan.”

In chapter 13, she said that “the Code also differs on when property of the estate is returned to the debtor.” In chapter 7, the estate property is distributed to a debtor only if the estate is solvent. Under chapter 13 plans in Boston, estate property revests in the debtor on discharge under Section 1327.

Seemingly to the contrary, Judge Bostwick described Section 554(d) as providing that undisclosed assets “remain[] property of the estate” that “the Chapter 7 trustee may administer” after the case is reopened. She stated the question as being “whether Section 554 requires the same result in these Chapter 13 cases.” In view of the “clear language of Section 1327” and the confirmation orders, she said, “it does not.” Unless the plan provides otherwise (as it does in Boston), Section 1327(b) provides that “the confirmation of a plan vests all of the property of the estate in the debtor.”

“Accordingly,” Judge Bostwick said, “all property of the estate, including any undisclosed assets, vested in the debtors upon discharge.” Furthermore, “Section 554(d) of the Code does not require a contrary result.” In the cases before her, she said that all estate assets had either been administered or had revested in the debtor on discharge.

Judge Bostwick admitted that “[s]ome courts have construed Section 1327 and its counterpart in Chapter 11, Section 1141, to vest in the debtor only property of the estate that is ‘administered’ or ‘dealt with’ under the plan.” She differed with those decisions, observing that “Section 1327 does not say that ‘only property that is scheduled and administered’ vests in the debtor,” unlike Section 554.

Were the trustee’s theory to prevail, Judge Bostwick said that the result would extend the life of a chapter 13 plan beyond the maximum five years. “[T]he Chapter 13 Trustee cannot circumvent the limitations set forth in the Code by proposing conversion of these cases to Chapter 7 to extend the Chapter 13 cases beyond the time frame Congress set,” she said.

Judge Bostwick rejected the trustee’s policy arguments, noting that the personal injury claims were not intentionally undisclosed. Were the nondisclosure intentional, she identified judicial estoppel as barring a debtor from recovering. There might also be criminal sanctions.

“[S]ince the confirmation orders vested all property of the estate in the debtors upon entry of the discharge,” Judge Bostwick held, “the personal injury claims vested in the debtors upon entry of the discharge, even if such claims accrued prepetition.”