Supreme Court Allows for Debtor Refunds in Converted Cases

Picture this scenario: You’re a Colorado homeowner fighting to save your home from foreclosure, paying several hundred dollars each month to a chapter 13 trustee to get caught up on your mortgage. Through no fault of your own, you lose your job and must let go of your home. You see your bankruptcy attorney about your options, and he recommends you convert your case to chapter 7, and you do so in order to finish up your case early, surrender your home, and get a discharge of all your debts sooner than you would have had you stayed in chapter 13.

One question though: After it became obvious you would let your home go, your chapter 13 trustee stopped paying the mortgage company and is holding several thousand dollars (that you’ve paid to him) in an account. Who gets the money?

Today, in the case of Harris v. Viegelahn, the U.S. Supreme Court decided this question in favor of the debtor in bankruptcy, ruling the money needed to be refunded to the debtor after conversion. Fortunately, in most cases, this also means that the new chapter 7 trustee doesn’t get the money either, since 11 U.S.C. § 348(f)(1)(A) states that the property of your bankruptcy estate (the stuff the trustee might be able to get) in a case converted from chapter 13 to chapter 7 consists only of property which you had when you filed chapter 13, and which you still have when you convert to chapter 7. There is a “bad faith” exception to this, so if you’re in a chapter 13 and considering converting to chapter 7, you should certainly contact a bankruptcy attorney to ensure you can convert, and can do so with as little headache as possible.

While the result reached in Harris v. Viegelahn won’t have a big effect on most folks in chapter 13 (hopefully you’ll finish your chapter 13, and if you need to convert, in most cases there’s not a lot of money the trustee is still holding), it may benefit folks in this sort of situation by allowing them to put some of their hard-earned cash toward the deposit on a rental lease agreement – all the more important in places like Denver, Aurora and Highlands Ranch, where rental prices seem to be skyrocketing lately.