What You Need To Know About Converted Cases

“No, Mr. Trustee, you can’t have my client’s tax refund.” Honestly, those have to be some of the most satisfying words I’ve utterly lately.

How’d I get away with it? Just guess. I read the code!

Actually, my co panelists on two recent presentations on vesting and conversion educated me. Jill Michaux and Doug Jacobs read the bankruptcy code and shared. As we started puzzling out the impact of the Chapter 13 debtor’s vesting choice, we asked ourselves whether the vesting choice impacted the bankruptcy estate when a 13 converts to 7.

It seems that whatever contradictions and confusions are created by §1306 and §1327, Section 348(f) is clear:

Except as provided in paragraph (2), when a case under chapter 13 of this title is converted to a case under another chapter under this title—

(A) property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion;

In my case, my client had filed Chapter 13 in 2008, and by 2010, found that it no longer made sense to try to keep the house. We converted the case to Chapter 7. Well after the 341, and even after the client’s discharge, there comes a raft of letters from the Chapter 7 trustee requesting that my office review the debtor’s returns (for a tax year not concluded as of conversion, yet) and report on, and turn over, any non exempt tax refund.

The trustee is clearly entitled to assets that are property of the bankruptcy estate. But this tax refund represents overpayment of taxes in 2010, from earnings in 2010. Those earnings did not exist at the commencement of the case in 2008. (Remember that conversion does not change the date on which the case is commenced. §348(a).)

So, the refund is not property of the Chapter 7 estate because it did not exist at the commencement of the case.

Comments

Mitch says:

May 4, 2011 at 7:23 pm

I fought this issue and battled a trustee over it to a win. Not only can the trustee not get the property acquired post-petition, but he also cannot contest exemptions if you have been in a confirmed plan for 1 year. The rule was amended on December 1, 2010 to make this rule uniform everywhere.
Cthompson77 says:

January 31, 2012 at 4:59 pm

Excellent article. Finally found the answer I was looking for. Thank you.