When Money Comes Back: Court Gives Guidance on Returned Funds

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By Diane Davis

Aug. 4 — What should a trustee do when funds that have been disbursed under two different debtors' confirmed Chapter 13 plans are returned by creditors for some unknown reason? An Alabama bankruptcy court gives instructions ( In re Dubose, 2016 BL 249854, Bankr. M.D. Ala., No. 12-80950-WRS, 8/2/16 ).

Judge William R. Sawyer of the U.S. Bankruptcy Court for the Middle District of Alabama concluded that when disbursed funds are returned to the Chapter 13 trustee after a debtor has obtained a discharge, the funds must be paid to unsecured creditors as provided for in the debtor's Chapter 13 plan, and any excess funds can be returned to the debtor.

If the disbursed funds are returned to the trustee after the debtor's Chapter 13 case is dismissed, the funds must be returned to the debtor, the court said.

Two Chapter 13 Cases

Debtor Timothy Dubose filed Chapter 13, which 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.

The IRS had a priority unsecured claim for $7,333 to be paid in monthly installments. Later, the bankruptcy court confirmed the debtor's Chapter 13 plan.

After the debtor obtained a discharge, the IRS refunded $1,565 to the trustee.

Debtor Tina Boyd filed for Chapter 13 protection. The bankruptcy court confirmed the debtor's Chapter 13 plan, and creditor Selene Finance filed a proof of claim for $97,933.

Later, the bankruptcy court dismissed the debtor's case for failure to make plan payments. Selene Finance returned $1,673 to the trustee.

Not Unclaimed Property

The court found that rejected funds aren't unclaimed property as argued by the Chapter 13 trustee.

In both cases, the delivery of the distribution to the creditor was successful, and the creditor rejected the distribution. Thus, the court determined that the funds don't fall within the purview of Bankruptcy Code Section 347(a) because they are not “unclaimed” within the meaning and purpose of that provision.

When a debtor has obtained a Chapter 13 discharge and a creditor returns disbursed funds, under Section 1326(c), the money is to be disbursed pursuant to the plan, the court said. The debtor's discharge doesn't change this result because while the debtor's in personam liability is extinguished, the creditors retain a claim against the debtor's bankruptcy estate until they are fully paid, the court said. Once the unsecured creditors are fully paid, any excess funds may be returned to the debtor, the court said.

When distributed funds are returned to the trustee, but after the debtor's case has been dismissed, the funds should be returned to the debtor based on Section 349(b)(3), the court concluded. The intent of Section 349(b), the court said, is to “undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found.”

Donald M. Phillips, Lanett, Ala., represented debtor Timothy S. Dubose; Curtis C. Reding, Montgomery, Ala., served as Chapter 13 trustee.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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