Harris v. Viegelahn
Headline: When a debtor switches from Chapter 13 to Chapter 7, the Court ruled that undistributed wages held by the Chapter 13 trustee must be returned to the debtor instead of being paid to creditors.
Holding: A debtor who converts a Chapter 13 case to Chapter 7 in good faith is entitled to the return of any undistributed postpetition wages held by the Chapter 13 trustee.
- Mandates return of undistributed post-petition wages to debtors after good-faith conversion.
- Stops trustees from distributing held wages to creditors after conversion.
- Creditors can require regular plan disbursements to avoid shortfalls.
Summary
Background
In February 2010, Charles Harris filed for bankruptcy under Chapter 13. His confirmed plan required $530 to be withheld from his wages monthly and paid to a mortgage lender and other creditors. After a foreclosure, the Chapter 13 trustee, Mary Viegelahn, continued to collect those withholdings, which accumulated to $5,519.22 by the time Harris converted his case to Chapter 7 on November 22, 2011. Ten days after conversion, the trustee disbursed the accumulated money to Harris’s lawyer, herself, a store, and several unsecured creditors. Harris sued to recover the funds; the Bankruptcy Court and District Court sided with him, but the Fifth Circuit sided with the trustee.
Reasoning
The Court addressed whether wages earned after the original filing but still held by a Chapter 13 trustee must go to creditors after the debtor converts to Chapter 7. The Court relied on the Bankruptcy Code’s conversion rules to say that, except when conversion is done in bad faith, postpetition wages are not part of the new Chapter 7 estate. Section 348(e) ends the Chapter 13 trustee’s authority at conversion, so a trustee may not continue to distribute money under the defunct Chapter 13 plan. Because Congress provided a specific bad‑faith exception, the ordinary result is that undistributed postpetition wages must be returned to the debtor. The Court therefore reversed the Fifth Circuit and ordered return of the funds to Harris.
Real world impact
Trustees must give back undistributed postpetition wages when a debtor converts in good faith, so debtors who convert can often reclaim withheld pay. Creditors can guard against shortfalls by requiring regular plan disbursements. The decision resolves a conflict among appellate courts and sets a uniform rule.
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