Bankruptcy / Bankruptcy Q&A

What Happens If My Chapter 13 Bankruptcy Plan Is Not Approved?

In the recent Chapter 13 bankruptcy case in Texas, a debtor’s plan was not approved by the trustee. Because of this, a dispute took place over the distribution of the debtor’s assets held by the bankruptcy estate and secured creditors.

Prior to dismissal of the Debtor’s Chapter 13 case, ASC—as servicing agent for Wells Fargo—received $46,800.00 in payments from the Chapter 13 Trustee. [Finding of Fact No. 9]. The amount of $46,800.00 represents 24 monthly payments of $1,950.00 (i.e. 24 × $1,950.00), and it is $1,950.00 which is the monthly amount due to the home lender under the Debtor’s original and amended—proposed but unconfirmed—Chapter 13 plans. [Finding of Fact No. 9].

Upon dismissal of the Debtor’s case, the Chapter 13 Trustee disbursed a lump sum payment of $19,061.70 to ASC. [Finding of Fact No. 9]. Baker requests an order from this Court requiring the Chapter 13 Trustee to recover this post-dismissal payment to ASC. [Finding of Fact No. 15].

As set forth above, Section 1326(a)(2) requires the Chapter 13 Trustee, upon dismissal of a Chapter 13 case, to disburse retained funds first to secured creditors in satisfaction of all unpaid adequate protection claims. Therefore, ASC should not be ordered to disgorge any post-dismissal payments it received from the Chapter 13 Trustee unless the payment was for an amount beyond the adequate protection payments due to ASC.

If a debtor’s Chapter 13 bankruptcy plan is not approved, the court ruled in this case that the proceeds left in the bankruptcy estate must be distributed first to the secured creditors, second to pay for the administration of the case, and finally the remainder of what’s left should be distributed to the debtor. If the debtor had “overpaid” the creditor then that money would be returned. However, it is up to the bankruptcy court to determine what is adequate payment, unfortunately there is not set definition.