Harris v. Viegelahn
The Supreme Court ruled that a person who switches a bankruptcy case from Chapter 13 to Chapter 7 gets back any of their wages that a Chapter 13 trustee was still holding but hadn't yet paid out to creditors.
The unanimous decision settles a split among lower courts and means bankruptcy trustees can no longer keep sending a debtor's leftover paycheck deductions to creditors once the debtor has switched bankruptcy tracks.
“We do not regard as a “windfall” a debtor’s receipt of a fraction of the wages he earned and would have kept had he filed under Chapter 7 in the first place.”
The Court explains why returning leftover wages to the debtor isn't an unfair bonus.
How it got here: The bankruptcy court and district court ruled for Harris, but the Fifth Circuit reversed and sided with the trustee, prompting Supreme Court review to resolve a circuit split.
The Case in Depth
What happened
Charles Harris filed for Chapter 13 bankruptcy after falling behind on his home mortgage, agreeing to have $530 withheld monthly from his wages for his trustee, Mary Viegelahn, to pay his creditors. After his home was foreclosed on, Viegelahn kept collecting his wages but stopped paying his mortgage lender, letting funds pile up. Harris later switched his case to Chapter 7, and Viegelahn then paid the accumulated money to his creditors anyway.
The question before the Court
When someone switches their bankruptcy case from Chapter 13 to Chapter 7, who gets to keep the paycheck money their bankruptcy trustee was still holding?
Why it matters
People who convert their bankruptcy case from Chapter 13 to Chapter 7 can now count on getting back any of their withheld wages that hadn't yet been handed to creditors, rather than risking that a trustee quietly pays that money out anyway. Bankruptcy trustees nationwide must change their practice on conversions, and creditors may push for faster, more regular payment schedules in Chapter 13 plans to avoid losing out on these funds.
What changes now
The case is sent back to the lower courts for further proceedings consistent with the Court's ruling, meaning Harris should receive the wages Viegelahn had wrongly distributed to his creditors. Going forward, this is the final word on how converted bankruptcy cases handle leftover wages nationwide, resolving the disagreement between the Fifth and Third Circuits on the issue.
What this does not decide
The Court's ruling applies to good-faith conversions from Chapter 13 to Chapter 7; it does not address what happens to postpetition wages when a debtor converts in bad faith, since a separate statutory provision treats those situations differently.
How the Court got there
The legal reasoning, step by step
- The Court looked to a bankruptcy provision, Section 348(f), which says that when a case converts from Chapter 13 to Chapter 7, the new Chapter 7 estate ordinarily only includes property the debtor had as of the original filing date — not wages earned afterward.
- Because postpetition wages fall outside the converted Chapter 7 estate, the Court reasoned that those wages are removed from the pool of assets available to be paid out to creditors, so letting a trustee still hand them to creditors afterward would undercut that design.
- The Court noted that a separate provision, Section 348(e), cuts off the Chapter 13 trustee's authority the instant the case converts, ending her power to perform trustee duties like distributing payments to creditors.
- The Court rejected the trustee's argument that other Chapter 13 provisions requiring payment 'in accordance with the plan' still applied, explaining that those provisions stop working once the case is no longer proceeding under Chapter 13.
- The Court concluded that returning the leftover wages to the debtor, rather than distributing them to creditors, is the outcome that fits the statute's structure, since nothing in the Code treats undistributed wages as already belonging to creditors.