
Joel R. Glucksman
Partner
201-896-7095 jglucksman@sh-law.comFirm Insights
Author: Joel R. Glucksman
Date: June 3, 2015
Partner
201-896-7095 jglucksman@sh-law.comIndividuals who need to seek bankruptcy protection generally have two alternatives: “wage earner” bankruptcy under Chapter 13 or liquidation under Chapter 7. There are important differences between the two. Most notably, in a Chapter 7 liquidation the debtor essentially piles their assets into a heap, turns them over to the appointed trustee and walks away with a discharge of all remaining debts. By contrast, in a Chapter 13, the debtor is required — for up to five years — to deposit all of their net disposable income into the trustee’s hands, who then distributes them to creditors.
For this reason, in a Chapter 13, the debtor’s post-bankruptcy earnings during the five-year period are considered available to fund creditor payments. By contrast, in a Chapter 7, anything that the debtor earns from the moment they have filed their bankruptcy petition stays with them and is not distributed to creditors.
An issue has arisen from the fact that many debtors elect to try Chapter 13 but ultimately prove unable to continue with the required payments. Their cases therefore convert to Chapter 7 liquidations. The lower courts have disagreed as to what happens to any excess funds that remain in the Chapter 13 trustee’s hands when a Chapter 13 is converted to a Chapter 7.
In a May 18, 2015 decision, Harris v. Viegelahn, the United States Supreme Court has definitively ruled that, to the extent that the funds in the Chapter 13 trustee’s hand came to the trustee from the debtor’s post-bankruptcy earnings, they are to be returned to the debtor should a Chapter 13 case convert to a Chapter 7.
This is not all good news, however. One must remember that Chapter 7 is specifically limited to debtors below very specific income levels. It is not generally available to anybody.
Are you a creditor in a bankruptcy? Have you been sued by a bankrupt? If you have any questions about your rights, please contact me, Joel Glucksman, at 201-806-3364.
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