Most New York bankruptcies are chapter 7 cases, and debtors don’t need to worry about property acquired after the case is filed. Section 541(a)(5) of the Bankruptcy Code governs “after-acquired” property, and limits it to three post-petition assets that can be roped into the bankruptcy estate if debtors acquire them within 180 days of filing. These are bequests, devises, and inheritances; divorce settlements; and life insurance proceeds. Thus, a winning lottery ticket would be included in the bankruptcy estate whenever the debtor obtained it, but an inheritance might not. Because of this distinction, the question becomes: What happens to these types of post-petition assets in chapter 13?
Most chapter 13 cases last longer than 180 days, and section 1306 of the Bankruptcy Code extends the definition of the bankruptcy estate’s property beyond what appears in section 541. Specifically, all post-petition property and wages are included in the bankruptcy estate, even if newly acquired property belongs to one of the three post-petition asset categories or debtors acquire it more than 180 days after filing.
For a long time, debtors argued that the law worked in the other direction, i.e. that section 541 limited post-petition property in chapter 13 cases to the three categories of property within 180 days. Unfortunately for them, appellate courts have ruled otherwise: The chapter 13 definition applies broadly to all property acquired after filing.
In one example, Carrol v. Logan, No. 13-1024 (4th Cir., October 28, 2013), the married debtors committed to a 60-month chapter 13 plan, but one of the debtors’ mothers died three years after the case was filed, leaving him with a $100,000 inheritance. The stakes were fairly high: With only two years left on the plan, the debtors could hope to save some of the inheritance for their post-bankruptcy future. Their plan promised their unsecured creditors only 3.8 percent on their claims, but if the inheritance were included, then the unsecured creditors would be repaid in full.
Naturally, the debtors argued that because the inheritance occurred after 180 days of their filing, it shouldn’t be included in the bankruptcy estate. The U.S. Court of Appeals for the Fourth Circuit sided with the trustee in the case, arguing that if section 541’s limits on post-petition property applied to chapter 13 cases, then section 1306 would be superfluous. The court also held that section 1306 specifically modified section 541 as it applies to chapter 13 cases. In a footnote, the court dismissed a handful of bankruptcy court opinions that found to the contrary as “unconvincing.”
The bottom line for chapter 13 debtors is that it’s usually a gamble to argue that property acquired more than 180 days after filing their cases shouldn’t belong to the bankruptcy estate. On the bright side, debtors in circumstances similar to the Carrols’ would be able to convert their cases to chapter 7, liquidate their enhanced bankruptcy estates, and walk away from bankruptcy earlier than they’d originally planned—possibly with a little left over.
It may seem unfair that a few month can make the difference between a post-petition windfall going straight to bankruptcy creditors and inheriting money from a loved one. But the bankruptcy rules are the rules. If you are in seriously financial difficulties, don’t let potential future property deter you from discussing your case with an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.