Individual debtors who find it difficult to pay all their debts generally have two options for obtaining debt relief under the Bankruptcy Code — either through a Chapter 7 or Chapter 13 bankruptcy petition. Filing under the appropriate Chapter will depend on the specific circumstances of the debtor and the desired outcome, ideally determined by a bankruptcy attorney.

Chapter 13 Bankruptcy Conversion

A major feature of Chapter 13 of the Bankruptcy Code is the distribution of a debtor’s future income among creditors mentioned in a court-approved payment plan. If for any reason, a Chapter 13 case is not working out for the debtor, he has an option to convert the Chapter 13 filing to a Chapter 7 case at any time. The conversion will lead to the termination of the services of the Chapter 13 trustee (the person who distributes the debtor’s future wages or properties to creditors under a court-approved payment plan).

But what happens to the debtor’s Chapter 13 accumulated wages if the provisions of Chapter 7 only include pre-filing income for payment to creditors? The United States Supreme Court addressed this issue in its recent decision in the case of Harris v. Viegelahn.

Background of Harris Case

Harris owed several creditors, one of them Chase Manhattan on an unpaid home mortgage. He filed for Chapter 13 bankruptcy and obtained a court-approved payment plan which ordered the continued payment of his Chase mortgage at $530 per month to be withheld from his future wages. Despite the Chapter 13 payment plan, Harris was still unable to keep up with his mortgage leading to its foreclosure. The trustee then stopped making payments to Chase causing an accumulation of $5,519.22 in withheld wages.

After the foreclosure, Harris converted his Chapter 13 case to Chapter 7. But the Chapter 13 trustee still continued to pay his Chapter 13 creditors using the accumulated withheld wages. While the Bankruptcy Court ordered the trustee to refund the accumulated wages, the appellate court reversed it.

Supreme Court Ruling

The Supreme Court ruled in favor of the debtor stating that undistributed wages earned after the filing date of the original Chapter 13 petition are excluded from the properties to be distributed in the converted Chapter 7 case for as long as bad faith does not exist in the conversion.

Importance of Contacting a Bankruptcy Attorney

Chapter 13 bankruptcy is governed by numerous complex rules that require strict compliance among the parties. If you are contemplating a Chapter 13 petition, consulting a bankruptcy attorney first is absolutely essential.

In Vancouver, Washington, the law office of Erin Bradley McAleer represents the human side of bankruptcy, helping people rise above their economic hardships through appropriate Chapter 13 bankruptcy proceedings.

Mr McAleer is highly regarded as one of the top 40 attorneys under 40 in Washington, and has earned a superb rating of 10.0 from Avvo.

Your call is welcome today at (360) 334-6277 to discuss your potential or existing bankruptcy situation.