Do Debtors or Creditors Get Undisbursed Chapter 13 Plan Payments Upo...

Chapter 13 trustees handle millions of dollars in plan payments every year. At some point in likely a sizable portion of cases, the trustee accumulates these payments instead of distributing the funds to creditors. What happens if a debtor's case is converted while the trustee has this accumulated money in its account? In 2012, the 3rd Circuit, in a majority opinion, held that the trustee must return the funds to the debtor (see decision here). Yesterday the 5th Circuit held that the trustee must distribute the funds to creditors (see decision here), thus creating a split on an issue that, as the Fifth Circuit stated, "has divided courts for thirty years," though only had previously produced one appellate court decision squarely on point.

With only one-third of Chapter 13 cases making it to discharge, the issue potentially affects a good number of debtors and involves a significant amount of money in total. Each individual debtor may (or may not) be entitled to a large sum of money in his or her estimation. In the 3rd Circuit case, the Chapter 13 trustee had accumulated over $9,000 in undistributed payments. In the 5th Circuit case, the trustee was holding about $5,500 in undistributed payments. And to the extent there isn't at least a local rule to rely on, Chapter 13 trustee probably would like clearer guidance on the issue.  

My initial reaction is that the accumulated payments should go to creditors. That's the bargain the debtor signed up for. The debtor makes payments under the plan and, in return, keeps her house and car and continues to benefit from the automatic stay. But the text of the Code provides little guidance, and I think there are good policy arguments on both sides, as well as a bit of legislative history that perhaps might tilt the balance toward the debtor. For now, as the 3rd Circuit noted, if creditors want to make sure that undistributed payments go to them upon conversion, they should request that such language be added to the plan. Seems like a rather easy fix? And now maybe we have another bankruptcy issue for the Supreme Court to consider? Stay tuned to see if a writ of certiorari is filed.