Post-confirmation Assets in Chapter 13: Property of the Estate? Maybe.

In a Chapter 13 bankruptcy, do Debtors have to pay the trustee new property they get after confirmation? The answer may surprise you.

Your chapter 13 case is confirmed, things are sailing along, and then it happens:  there’s an inheritance or personal injury reward or life insurance payout or large asset of new property. Is this property of the estate, or is this the debtor’s and excluded from the bankruptcy case?

It all hinges on the tension between Sections 1306 versus 1327 of the Bankruptcy Code. Let’s see what all the fuss is about.

11 USC 1306: All Property and Earnings are of the Estate

Section 1306(a) of the Bankruptcy Code says that “Property of the estate includes, in addition to the property specified in section 541 of this title: (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first; and (2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.”

That seems clear. The estate counts all property and earnings after case commencement.

11 USC 1327: All Property Vested in Debtor, unless Plan or Order Says

Section 1327(b) of the Bankruptcy Code goes the other direction: “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.”

Well, that’s also pretty straightforward. It all goes back to debtor after confirmed. Further, subsection (c) says that it’s “free and clear of any claim or interest of any creditor provided for by the plan.” Again, fairly clear. It’s all debtor’s, so hands off.

The Approaches to 1327 vs 1306

Courts have taken five different approaches to this apparent conflict between sections 1327 and 1306. They range from “the estate is in effect until discharge, period” to “the estate is gone at confirmation” …with shades of gray in between. Let’s take a closer look.

Estate Preservation approach: Mostly 1306

First, courts utilize the Estate Preservation approach, which says that the vesting at confirmation doesn’t dissolve or eliminate the estate. The estate is still there and exists, and these cases rely heavily on 1306(a) and give very little weight to 1327. See, for example, the Eighth Circuit in Security Bank of Marshalltown, Iowa v. Neiman, 1 F. 3d 687 (8th Circuit, 1993).

Modified Estate Preservation approach, aka Estate Replenishment Approach

Second, there’s the Modified Estate Preservation approach used in the First Circuit. Barbosa v. Soloman, 235 F. 3d 31 (1st Circuit, 2000). This doctrine says that the preconfirmation property revests to debtor (1327b-c), but that postpetition income and assets fund the estate (1306a). Id. at 37, 42.

Conditional Vesting Approach

Third, another approach has emerged, the conditional vesting approach, which says that the debtor gets the immediate right to enjoy the bankruptcy estate, but it’s not final until debtor has faithfully executed their duties and gotten the discharge. Woodard v. Taco Bueno Rests., Inc., No. 4:05-CV-804-Y, 2006 WL 3542693, at 9 (N.D. Tex. Dec. 8, 2006). The problem with this approach is the clear language of 1327 which says it revests to debtor “free and clear.” Something isn’t free and clear if it’s conditional.

Estate Transformation approach

Fourth, some courts (think 7-11) use the Estate Transformation approach. The thinking here is that whatever is needed to fund the plan is estate property; everything else is controlled by the Debtor.  Matter of Heath, 115 F. 3d 521, 524 (7th Circuit, 1997). Also see Telfair v. First Union, 216 F. 3d 1333  (11th Circuit, 2000).

Estate Termination approach: Mostly 1327

Finally, some courts give heavy credence to 1327, and consider 1306 with little to no weight. These courts state the all property revests to debtor at confirmation, and that the estate terminates at confirmation. See, for example, In re Dagen, 386 BR 777 (Bkry Ct, CO, 2008), In re Baker, 620 B.R. 655, 663, 667-68 (Bnkry CO, 2020), and In re Toth, 193 BR 992, (Bkry Ct, ND GA 1996), which followed In re Petruccelli, 113 BR 5 (Bkry Ct, SD CA 1990).

So, what happens if you acquire an asset or income postpetition really depends on where you are, because of the circuit split. As many circuits haven’t yet ruled on it, it can often depend on who your judge is, and which approach persuades him or her.

Ninth Circuit Decisions about Post-Petition Assets

Jones in the Ninth Circuit: Estate Termination

Locally here in California and the 9th Circuit, the matter was settled in 2009. That’s when the BAP took up, and the Ninth Circuit affirmed,  In re Jones, 420 BR 506 (9th Cir BAP, 2009), affirmed by the Ninth Circuit Court of Appeals in 657 F3d 921 (9th Cir, 2011). There, the Bankruptcy Appellate Panel reviewed the four options, scrutinized the language of 1306 and 1327, and then held, “We agree with the bankruptcy court’s interpretation and adopt the estate termination approach for several reasons.” Id. at 514.

While some feel the Estate Termination approach ignores 1306, the BAP reasoned it was just reading and applying it as written. It held: “Simply put, Section 1306 establishes the moment when estate property is first created and the outside triggering event which terminates property of the debtor from becoming estate property. Significantly, Section 1306 does not state that property of the estate can only become non-estate property when the case is closed, dismissed, or converted.” Id. at 515.

Then, reviewing 1327, both (b) and (c), the Panel noted the verbiage changed between the two. “The change in language from “vests … property of the estate” to “property vesting in the debtor” is compelling to this Panel’s conclusion that confirmation changes estate property to property of the debtor unless the plan or confirmation order specifically provides otherwise.” Id.

Automatic Stay, Asset Sales, and Motions to Modify Plan

With the Estate Termination approach, whether the plan order says property revests in the debtor at confirmation or at discharge has big interplay with the Automatic Stay. If the estate is terminated and it revests with debtor, any post-petition debt can be collected against the debtor. But if the plan or order says property revests in the estate, then only post-petition assets can be collected against for the same debt (absent relief from stay).

This is distinguished, at least locally, from the doctrine about what happens if debtor earns more income postconfirmation. This can often result in a Motion to Modify Plan Payments.  Can the trustee file a motion to modify to increase the debtor’s plan payment? The answer, like most things in law, is it depends on your circuit. Spoiler of the previous link: locally, courts look at “good faith.”

Also, what if an existing asset is sold during the plan but the estate doesn’t revest until discharge, the proceeds will have to be used to pay more of the bankruptcy debt. Black vs Leavitt (In re Black), 609 B.R. 518 (9th Circuit BAP, 2019). Note: an apparently contradictory ruling is reached in In re Marsh, Case No. 18-42471 (Bankr Ct, WD MO, 2023), where Judge Fenimore reviewed the five approaches for evaluating whether the estate terminates or not, and the found, “The court’s determination that the proceeds are property of the Marshes’ estate….”  Again, vary wildly depending where you are, so know your law, and know your judge.

The result can be different yet again if the inheritance was owned on the date of filing and pays monthly. If an inheritance doesn’t generate income, it can be excluded from being contributed to the plan. In re McGuire, Case No. 20-61183 (Bankr Ct, ND New York, 2022). There, Judge Diane Davis ruled, “this Court aligns itself with the minority bankruptcy court decisions that advance the analysis that ‘if the exempt asset in question is an anticipated stream of payments, it is included in projected disposable income; if the exempt asset is other than a stream of payments, it is not included.'” The Court did find that the existing inheritance is relevant for liquidation purposes, just like any other prepetition asset.

Summing up

Is a windfall (like an inheritance or injury or court award) received after a case is confirmed the property of the estate in a Chapter 13?  Like the varying court rulings on Motions to Modify Chapter 13 Plan, postconfirmation assets are also jurisdiction-dependent. There are five different theories in various districts, and if you are in a district where the circuit court hasn’t ruled on it yet, be prepared to brief it, and it’s the judge’s pick which one they’ll go with.  Hopefully this provided you a starting point, and good luck.