Until 1994, three options existed for the disposition of plan contributions held by the chapter 13 trustee upon conversion to chapter 7: The funds could be given to (1) the chapter 7 estate, (2) to the debtor or (3) to creditors. Since the 1994 amendments to the Bankruptcy Code revised § 348(f), the first option for the disposition of funds from a converted chapter 13 case after confirmation of the plan was resolved: The chapter 7 estate is not a recipient of the funds unless the conversion to chapter 13 was made in bad faith. In Harris v. Viegelahn, the Supreme Court resolved the rights of the other competing parties to the funds by holding that a chapter 13 debtor who voluntarily converts to chapter 7 is entitled to the return of any post-petition wages not yet distributed by the chapter 13 trustee.
The Court relied heavily on the language of 11 U.S.C. § 348(f), which limited property of the converted chapter 7 estate to property belonging to the debtor “as of the date” of the original chapter 13 petition. This would not include post-petition wages. As such, the Court reasoned, those earnings are removed from the pool of assets available to be liquidated and paid to creditors in the chapter 7 case. In contrast, the Court noted, a bad-faith conversion to chapter 7 does include post-petition earnings so as to penalize the debtor who is attempting to manipulate the system. This contrast, then, facilitates the honest debtor’s aim toward a fresh start. Thus, although the statute does not say “debtors get the accumulated wages in the hands of the chapter 13 trustee,” the Court concluded that this is the most sensible construction of the statute.
As such, the chapter 13 trustee is required to return those accumulated wages in her hands to the debtor. The trustee’s efforts in Harris to pay chapter 13 creditors violated § 348(e). The Court sealed the fate of the chapter 13 creditors by holding that they do not have a vested right in the funds held by the chapter 13 Trustee. Finally, the Court held that the chapter 13 plan’s language that, upon confirmation, property of the estate “shall remain as property of the estate” does not change the analysis, because the estate referred to in the plan is the chapter 13 estate. Thus, the debtor’s wages were property of the chapter 13 estate, which does not become property of the creditors until it is distributed to them. The plan also provided that upon conversion, the property “as may revest in the debtor shall so revest.” Because the wages did not become part of the chapter 7 estate, the debtor’s post-petition wages revested in him.
The Court suggested a practice tip to avoid any unfairness in chapter 13 trustee holding funds for long periods of time by including a regular schedule for disbursements in the plan itself.