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Appellate Court Rules that Post-Petition Income Reverts to Debtor Upon Conversion of Bankruptcy Case to Chapter 7

Vladimir Makovsky [Public domain], via Wikimedia CommonsThe Bankruptcy Code provides individuals and families with several options when they need to file a bankruptcy petition, and it allows them to convert a case from one chapter to another in certain circumstances. A federal appellate panel in California recently considered an interesting question:  if a debtor converts a case from Chapter 11 or 13 to Chapter 7, what happens to income earned after the petition but before conversion? It would belong to the bankruptcy estate under Chapters 11 or 13, but to the debtor under Chapter 7. The court ruled that it reverts to the debtor once the case is converted from Chapter 11 back to Chapter 7. In re Markosian, 506 B.R. 273 (B.A.P. 9th Cir. 2014) (PDF file).

By filing a bankruptcy petition, a debtor creates a legally distinct “bankruptcy estate.” A court-appointed trustee has the right to make certain decisions about estate property and the duty to manage the estate responsibly. In general, any property that a debtor owns when he or she files a bankruptcy petition becomes part of the estate. 11 U.S.C. § 541. In Chapter 11 or 13 cases, property acquired and earnings received for services rendered by the debtor, including salary or wages, also become part of the bankruptcy estate until the case is dismissed, converted, or closed. 11 U.S.C. §§ 1115, 1306.

The debtors in Markosian, a married couple, filed a Chapter 7 bankruptcy petition in February 2009. The trustee moved to dismiss the case for abuse under 11 U.S.C. § 707(b), claiming that the debtors had enough income to pay their debts. In response, the debtors converted the case to Chapter 11. While Chapter 13 is much more common among individuals and families, the Bankruptcy Code sets upper limits on the amount of debt a Chapter 13 debtor can have. Currently, Chapter 13 is not available to debtors whose secured and unsecured debts exceed $1,149,525 and $383,175, respectively. 11 U.S.C. § 109(e), “Revision of Certain Dollar Amounts in the Bankruptcy Code Prescribed Under Section 104(a) of the Code”, 78 F.R. 12089 (Feb. 20, 2013).

After about two years, the debtors had not been able to confirm a plan under Chapter 11 because the wife had lost her job. They converted the case back to Chapter 7 in March 2012. While the case was still under Chapter 11, the husband received wages totaling about $102,000. He turned this over to the trustee but filed a motion to determine the status of the money after converting the case back to Chapter 7. The bankruptcy court ruled that the money was part of the bankruptcy estate under § 1115, but that it ceased to be part of the estate once the case was reconverted to Chapter 7.

In affirming the ruling, the Bankruptcy Appellate Panel (BAP) noted that the Bankruptcy Code specifically states that the the debtor’s post-petition earnings are not part of the estate in a case converted from Chapter 13 to Chapter 7, 11 U.S.C. § 348(f)(1)(A), but does not say anything about Chapter 11. The BAP held that the same principle applies and that post-petition earnings revert to the debtor in a conversion from Chapter 11 to Chapter 7.

Since 1997, bankruptcy lawyer Devin Sawdayi has guided people in the Los Angeles and surrounding area through the Chapter 7 and Chapter 13 personal bankruptcy processes, helping them repair their finances with dignity and respect. To schedule a free and confidential consultation with a skilled and experienced attorney, contact us today online or at (310) 475-939.

More Blog Posts:

California Bankruptcy Court Reviews Grounds for Dismissing a Chapter 7 Case for Abuse, Los Angeles Bankruptcy Lawyer Blawg, March 11, 2014

Court Converts Bankruptcy Case from Chapter 13 to Chapter 7 Based on Finding that Debtor Withheld Information, Los Angeles Bankruptcy Lawyer Blawg, January 27, 2014

Understanding the Chapter 7 “Means Test”, Los Angeles Bankruptcy Lawyer Blawg, October 4, 2013

Photo credit: Vladimir Makovsky [Public domain], via Wikimedia Commons.