What happens to funds recovered by the trustee after the final plan payment is made in a chapter 13 case? According to the U.S. Bankruptcy Court for the District of Iowa, absent a plan provision providing otherwise, those funds revert to the debtors.

In In re McCrorey, the debtors confirmed a chapter 13 plan, which required them to make payments for 60 months and provided no payments to unsecured creditors. Almost five years later, the trustee filed a “Notice of Completion of Plan” in which she stated that debtors had completed all payments due under the confirmed plan and indicated that a final report and account would be filed once all issued checks had cleared. As recommended, an order of discharge was entered, but the final report had not been submitted and the case remained open.

Two months later, the trustee received a check in the amount of $4,883.43. Apparently, three years prior to the bankruptcy filing, the debtors had a vehicle repossessed by the bank. The bank had misapplied at least one of the debtors’ payments on the vehicle resulting in the remittance. The trustee and debtors submitted a stipulated order acknowledging the funds resulted from a pre-petition claim and authorizing their payment into the plan for disbursement to unsecured creditors.

The court began its analysis by acknowledging that the funds are the result of a pre-petition claim and so are property of the bankruptcy estate. However, if the funds are viewed as a payment by the debtors into the plan, the plan would require modification. Under Bankruptcy Code §1329(c) modification is not possible after the debtors have completed all the payments.

The court noted that if the funds are viewed as an asset “recovered” by the trustee then a modification may not be required. The court then turned to the confirmed plan, stating that such plan is “a contract between the debtor and the debtor’s creditors.” While the plan provided for no payments to unsecured creditors, it did provide that “[a]llowed nonpriority unsecured claims that are not separately classified will be paid, pro rata from, the funds remaining after disbursements have been made to all other creditors provided for in this plan.” However, a separate provision stated that property of the estate vests in the debtors at plan confirmation. So even though the recovered funds were estate property, the court found that confirmation of the plan vested the funds with the debtors.

In conclusion, the court could not locate any authority in the Bankruptcy Code or the confirmed plan to permit the trustee to distribute the recovered funds to the creditors. “In short, under these particular circumstances, when all 60 months of plan payments have been made, the trustee has filed a notice that the plan has been completed and recommended entry of the discharge, and the discharge has in fact been entered, and finally that there is no plan provision permitting [the trustee] to recover and administer post-confirmation assets, the court can discern no authority for trustee to administer these funds.” It further declined to exercise its discretion to approve the arrangement agreed to by the parties, and instead directed the trustee to remit the funds to the debtors.

Our Take:

Creditors of chapter 13 debtors should push for inclusion of a provision in the plan permitting the trustee to recover and administer post-confirmation assets. Otherwise, the debtors could end up getting a windfall at the expense of creditors.