Auto Accident Settlement Funds Belong to Bankruptcy Estate

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By Diane Davis

Aug. 10 — A Chapter 13 debtor who was in a car accident three years after his plan was confirmed is not entitled to his portion of the settlement proceeds until his creditors are paid, a bankruptcy court in Louisiana held Aug. 5 ( In re Wilson, 2016 BL 254523, Bankr. W.D. La., No. 11-81519, 8/5/16 ).

Judge John W. Kolwe of the U.S. Bankruptcy Court for the Western District of Louisiana concluded that the debtor must pay a portion of the proceeds from his settlement funds towards his remaining plan balance and increase the payments to unsecured creditors because the proceeds are property of the estate.

The court found the modified plan proposed by Chapter 13 trustee Jon C. Thornburg is confirmable and the best interests of the creditors test must be redetermined as of the date of the proposed modification. Chapter 13 of the Bankruptcy Code allows individuals receiving regular income to obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.

There are five different approaches being used by courts to determine whether property acquired by a Chapter 13 debtor after confirmation is property of the estate, the court said. The court adopted the growing majority view — the “estate-replenishment approach” — and found that the proceeds of the debtor's post-confirmation cause of action are property of the estate.

Debtor Clyde Wilson was in a car accident three years after his Chapter 13 plan was confirmed. The debtor amended his schedules to disclose the potential cause of action stemming from the accident. The debtor's special counsel negotiated a settlement of $196,845, and after the payment of fees and expenses, the debtor will receive $74,067.

The court sided with the Chapter 13 trustee's modified plan. The best interests of the creditors test under Section 1325(a)(4) must be redetermined as of the date of the proposed modification, the court concluded, adopting the majority view on this issue.

Since the total allowed claims are $11,359, the modified plan requires that this amount be paid into the plan from the settlement proceeds, the court said.

Evidence supporting the debtor's claim that he needed all of the settlement proceeds for ongoing medical and living expenses would have been considered by the court, but after being given an opportunity, no evidence was submitted to support such a contention, the court said.

Thomas C. McBride, Alexandria, La., represented debtor Clyde Wilson, Jr.; Chapter 13 trustee Jon C. Thornburg, Alexandria, La.

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