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Chapter 13 Debtors Beware: Post Petition Inheritances in Chapter 13

In In re Dale, 505 B.R. 8 (B.A.P. 9th Cir. 2014), the BAP held that for purposes of determining what constitutes property of the bankruptcy estate in a Chapter 13 bankruptcy, §1306 of the Bankruptcy Code includes all property described in §541, but expands the 180 day post-filing timeframe of §541(a)(5) [for post-filing property that would have been property of the estate if it was acquired pre-filing] to include all property that the debtor acquires post-filing until the case is closed, dismissed or converted. In other words, §1306 includes property included in §541 but expands the time in which property acquired post petition is considered property of the estate from 180 days post-filing to until the case is closed, dismissed or converted.

More than 180 days after Debtors (Robert and Kathy Dale) filed a chapter 13 bankruptcy petition, the mother of one of the two joint Debtors passed away, leaving Mr. Dale approximately $30,000. Nearly 2 months later, Debtors filed a declaration with the bankruptcy court disclosing Mr. Dale’s inheritance. The Chapter 13 trustee demanded that Mr. Dale turn over the inherited funds to the Trustee for distribution to Mr. Dale’s creditors. The Trustee subsequently filed a motion to dismiss Debtors’ bankruptcy for failing to make payments under their proposed plan. Later, the Trustee filed an amended motion to dismiss because: 1) the Debtors’ had failed to comply with the Trustee’s recommendations; 2) the Debtors had failed to disclose and turn over the nonexempt inheritance proceeds; and 3) the Debtors were still delinquent on plan payments. The Debtors argued that their case should not be dismissed because Mr. Dale’s post-petition inheritance was not property of the bankruptcy estate because he received the inheritance rights more than 180 days after filing bankruptcy.

The bankruptcy court held that inheritance received by a chapter 13 debtor before the case is closed, dismissed or converted is property of the bankruptcy estate under §1306. The Debtors timely appealed this holding to the 9th Circuit Bankruptcy Appellate Panel (BAP), which reviewed de novo.

The issue before the BAP was whether §§541(a)(5)(A) and 1306(a)(1) require that post-petition inheritance be included in a debtor’s bankruptcy estate in a Chapter 13 case where the debtor’s inheritance is received outside of the temporal limit of §541(a)(5)(A) (ie. “180 days after filing”) but within the temporal limit of §1306(a)(1) (ie. after filing, but “before the case is closed, dismissed, or converted”).

BAP Analysis:
The BAP began its analysis by looking to the plain language of both §541 and §1306. The court determined that the plain language of both statutes manifested Congress’s intent to expand a debtor’s bankruptcy estate in a Chapter 13 case by including the types of property described in §541 and expanding the time in which this property can be considered property of the estate post-filing. The 9th Circuit BAP court held that the plain language of §1306(a) incorporated the kind of property described in §541 into §1306(a)’s longer time period.

The court also stated that if the 180 day period prescribed by §541(a)(5)(A) restricted the property to be included in a Chapter 13 estate, then §1306(a), which expands this time period, would lose its meaning. The court noted that under the maxims of statutory interpretation, a court should not find that the legislature intended the absurd result of rendering a statute meaningless unless absolutely necessary. The court also cited the statutory maxim of specific provisions controlling the general provisions. The court in turn held that because §1306 is specific to Chapter 13 bankruptcies whereas §541 is a general provision, that §1306 applies to all Chapter 13 debtors and includes all property within §541.

Author’s Note:

This decision may be significant to professionals whose clients may be in in a position to receive some sort of large cash payment after filing a Chapter 13 bankruptcy but before the case is closed, dismissed or converted. Specific examples identified by the court include bequests, devises, and inheritances. Therefore, it may be advisable to ask a client about the health of family members and whether they expect to receive any inheritances from family members.

A question raised by the court’s decision is whether it extends to “kinds of property of the estate” identified in §541 other than inheritances, bequests and devises. The court specifically stated that it applies to all kinds of property under §541, therefore, it is subject to the expanded timeframe of §1306(a): from post-petition until the case is “closed, dismissed, or converted”.

Because the court’s decision extends to “kinds of property of the estate” identified in §541, a debtor’s settlement agreement or divorce agreement (for example) entered into before the Chapter 13 case is closed, dismissed or converted may be included in the Chapter 13 estate under §1306, whereas it would not be included in a Chapter 7 case under §541.

Another unanswered question is what happens to the debtor’s Chapter 13 plan if this new property is included in the estate. For example, the debtor receives an inheritance one day before the case is closed. Does the trustee use the inheritance to pay more to the unsecured creditors than they would have otherwise received by amending the confirmed chapter 13 plan? Does the debtor receive the remainder of what was distributed to creditors after the plan is amended? The case does not answer these questions.

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