Recently, the Fourth Circuit Court of Appeals issued an opinion in Carroll v Logan. This will have an impact for future chapter 13 cases in this circuit.
In Carroll, the debtors filed a chapter 13 case in 2009.
The Carrolls’ plan provided for a payment to unsecured creditors of
approximately 3.8%, that is, each unsecured creditor who filed a claim would
receive approximately 4% of what they claimed was owed.
A little over three years after the debtors’ filed bankruptcy, Mr. Carroll
notified the court that he would receive $100,000.00 from an inheritance.
Upon such notice, the chapter 13 trustee moved to modify their plan to provide
for the $100,000.00 to be paid through the plan toward unsecured
creditors. The debtors’ objected to the trustee’s motion.
At issue were two provisions of the Bankruptcy Code: Section 541 and
Section 1306. Section 541 defines what property interests come into the
bankruptcy estate upon filing for bankruptcy protection. In particular,
Section 541(a)(5) states that any property that the debtor acquires or is
entitled to within 180 days after filing bankruptcy by bequest, devise or
inheritance becomes property of the bankruptcy estate. A reason for
this provision is so that if a debtor knows that a family member is going to
pass on soon and the debtor has lots of debts, the debtor won’t file bankruptcy
immediately before the family member passes to discharge his debts and then
have the full inheritance. If a debtor inherits property within 180 days
after filing, the trustee can get those assets to pay creditors.
In the Carrolls’ case, they had filed for bankruptcy in 2009 and did not
become entitled to inherit anything until well after the 180 days since filing
had passed. As such, the debtors’ argued, they should not have to submit
their inheritance to the chapter 13 trustee.
The trustee countered and the Fourth Circuit agreed that Section 1306 allows
the trustee to reach the inheritance. Section 1306 states that property of the bankruptcy estate includes, in addition to the property specified in Section 541
(see above), all property that the debtor acquires after commencement of the case but before the case is closed,
dismissed, or converted to a case under a different chapter. As such,
under Section 1306, even though the debtor did not acquire the property within
180 days after his bankruptcy filing as set forth under Section 541, Section
1306 states that the after acquired property does come into the bankruptcy
estate until the case is closed, dismissed or converted. Therefore, the
debtors would be required to pay the $100,000.00 inheritance into the plan
(less their exemptions, if any).
This can create another factor to carefully consider before choosing a
chapter 7 case or a chapter 13 case. If you do not stand to inherit much
from family members, it may not be much of a factor. If you do stand to
inherit something, a chapter 13 case can go on for up to five years and any
inheritance acquired could go to paying your creditors. At the same time,
if you do not qualify for a chapter 7 case because you “flunk” the means test
or if you must file a chapter 13 to cure mortgage arrears or other reasons,
there may not be any other bankruptcy options.
A skilled bankruptcy professional such as those on this website can help you
navigate the world of bankruptcy. If you are facing financial issues,
contact one of us today.