In Bankruptcy Information

inheritanceA Chapter 13 can continue for three to five years while the debtors catch up on mortgage payments, make plan payments and do other things that individual reorganization involves. Sometimes debtors receive property after they filed. Sometimes it’s a fairly large amount, such as an inheritance. The question arises, what difference will this make in the Chapter 13 plan?

First of all, there is a difference between “property” and “income” in bankruptcy. In a Chapter 13 the court is concerned about both in deciding whether a plan can be confirmed. First the court looks at what property the debtor owns and how much would be available to creditors if the debtor had filed Chapter 7. This is called the “best interests” test, and it answers the question “is this plan in the best interests of the creditors?” The court looks at what property could be sold to pay creditors in Chapter 7. That sets a minimum amount that must be repaid in the Chapter 13.

Next is the “best efforts” test. That looks at what is the best effort that the debtor can make to repay creditors. It can get complicated but basically the best effort is whatever the debtor has left over each month after paying living essentials such as housing, food, medical, insurance, utilities and the like.

Now suppose that the debtor gets some post-petition property (property acquired after filing the bankruptcy). Suppose it’s an inheritance of $50,000. Is this property that should be included in the best interests test?

The answer is “no” because the inheritance came after the bankruptcy was filed and therefore didn’t exist at the time of filing. The best interests test looks at what the debtor owns as of the date of filing. So the debtor doesn’t have to go back and add this to her property to see what the new floor will be.

Is this income that should be included under the best efforts test? This gets a little murkier because a trustee is likely to argue that since the debtor now has more money he should pay more just out of fairness. If your attorney is sharp he’ll point out that the best interest test exists under section 1322 of the Bankruptcy Code, which governs confirmation of a plan in the first place. But once a plan is confirmed it can only be modified under section 1329 of the Code, which doesn’t include a best efforts test.

The point is, if you receive post-petition property you need an attorney who fully understands the Bankruptcy Code.

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