The debtors filed chapter 13. The case was converted to chapter 7 prior to confirmation. The debtors had made plan payments of $2,150 and moved for their return. Of the $2,150, I have been advised that $630 is from postconfirmation income and $1,520 is from rental income from property debtors owned at the petition date.

The chapter 7 trustee opposed and requested that the chapter 13 trustee turn the funds over to him. I rule that postpetition payments from wages should be returned to the debtors, and the rental income be turned over to the chapter 7 trustee.

11 USC § 1326(a)(2) provides that if a plan is not confirmed, the trustee shall return any such payments to the debtor after deducting any unpaid claim allowed for under § 503(b) of the Bankruptcy Code. Whether the debtors keep the funds is muddled by other sections of the Code that make it difficult to determine if a debtor, even if they get their pre-confirmation plan payments back, can keep them.

11 USC § 1306(a) provides that property of the estate include not only that defined in § 541, but postpetition earnings as an exception to § 541(a)(6) and after-acquired property.

When a chapter 13 case converts, 11 USC § 348 spells out the ramifications. As a general proposition, when a case converts, it is treated as if the original petition date was effective, not the date of conversion, subject to specific exceptions. See, 11 USC § 348(a-c). For cases filed before the effective date of the Bankruptcy Reform Act of 1994, October 22, 1994, there was a conflict in the circuits about whether the chapter 7 estate of a converted chapter 13 would include after-acquired property or payments under the plan.

This is summarized in In re Calder, 973 F2d 862, 865 (10th Cir       4 ABR 289  1992), decided the property of the estate of a converted chapter 13 includes after-acquired property, and said:

The courts of appeals addressing this issue have held that upon conversion from Chapter 13 to Chapter 7 all property of the Chapter 13 estate-- including after-acquired property that is part of the Chapter 13 estate pursuant to § 1306(a)--is included in the Chapter 7 estate. See In re Lybrook, 951 F.2d 136, 138 (7th Cir.1991) (holding that "the Chapter 13 estate passes unaltered into Chapter 7 upon conversion"); Armstrong v. Lindberg (In re Lindberg), 735 F.2d 1087, 1090 (8th Cir.) (stating that "[t]he bankruptcy courts are in general agreement that in a case converted from chapter 13 to chapter 7, the property of the estate consists of all property in which the debtor has an interest on the date of conversion"), cert. denied, 469 U.S. 1073, 105 S.Ct. 566, 83 L.Ed.2d 507 (1984); Winchester v. Watson (In re Winchester), 46 B.R. 492, 495 (Bankr. 9th Cir.1984) (stating that "logic dictates that the date of conversion [from Chapter 13 to Chapter 7] is the controlling date on which to determine ... property of the Chapter 7 estFRCVCTC ate"). But cf. Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797, 803 (3d Cir.1985) (suggesting in dicta that after- acquired property should not be part of the postconversion Chapter 7 estate).

The circuit cases were not focusing on preconfirmation plan payments and the direction of § 1326(a) that, upon conversion, payments should be returned to the debtor. Some courts have held the funds should be returned to the debtor and not administered by the chapter 7 trustee. See, e.g., Smith v. Strickland, 178 BR 524 (MD Fla 1995) and In re Mann, 160 BR 517 (Bankr D Vt 1993) (containing an extensive analysis of the cases).

Since this case was filed, the problem was largely resolved by a 1994 Bankruptcy Reform Act amendment found in 11 USC § 348(f):

(1) Except as provided in paragraph (2), when a case under chapter 13 of this title is converted to a case under another chapter under this title -

(A) property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion; and

      4 ABR 290 

(B) valuations of property and of allowed secured claims in the chapter 13 case shall apply in the converted case, with allowed secured claims reduced to the extent that they have been paid in accordance with the chapter 13 plan.

(2) If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property in the converted case shall consist of the property of the estate as of the date of conversion.

The effective date of § 348(f) is for cases filed after October 22, 1994. Sec 701 of PL 103-304. This case was filed before the effective date. Nonetheless, the legislative history indicates that Congress thought the Bobroff case represented the better law.

See H.R. Rep. No. 835, 103RD Cong., 2ND Sess. 1994, 1994 U.S.C.C.A.N. 3340, _____, 1994 WL 562232 (Leg.Hist.):

Section 311. -8-8-8-8-8-8-8-8-8-8-8- sion of case under chapter 13. This amendment would clarify the Code to resolve a split in the case law about what property is in the bankruptcy estate when a debtor converts from chapter 13 to chapter 7. The problem arises because in chapter 13 (and chapter 12), any property acquired after the petition becomes property of the estate, at least until confirmation of a plan. Some courts have held that if the case is converted, all of this after-acquired property becomes part of the estate in the converted chapter 7 case, even though the statutory provisions making it property of the estate do not apply to chapter 7. Other courts have held that property of the estate in a converted case is the property the debtor had when the original chapter 13 petition was filed. These latter courts have noted that to hold otherwise would create a serious disincentive to chapter 13 filings. For example, a debtor who had $10,000 equity in a home at the beginning of the case, in a State with a $10,000 homestead exemption, would have to be counseled concerning the risk that after he or she paid off a $10,000 second mortgage in the chapter 13 case, creating $10,000 in equity, there would be a risk that the home could be lost if the case were converted to chapter 7 (which can occur involuntarily). If all of the debtor's property at the time of conversion is property of the chapter 7 estate, the trustee would sell the home, to realize the $10,000 in equity for the unsecured creditors and the debtor would lose the home. This amendment overrules the holding in cases such as Matter of Lybrook, 951 F.2d 136(7th Cir.       4 ABR 291  1991) and adopts the reasoning of In re Bobroff, 766 F.2d 797 (3d Cir. 1985). However, it also gives the court discretion, in a case in which the debtor has abused the right to convert and converted in bad faith, to order that all property held at the time of conversion shall constitute property of the estate in the converted case.

The 1st Circuit in In re Young, 66 F3d 376 (1st Cir 1995) discussed this amendment in a chapter 13 case which converted after confirmation. While recognizing that the amendment did not apply to cases filed before the effective date, the amendment inclined the court to follow the Bobroff line of cases.

I will follow In re Young, especially since its rationale is that much stronger given the additional boost of § 1326(a) requiring the return of funds to the debtor upon conversion of a chapter 13 case prior to confirmation, but only to the extent that the payments did not come from property which existed at the time of filing.

To the extent that the chapter 13 trustee holds funds which were the product of property which debtors brought into the estate when debtors filed, this would continue to be property of the estate. 11 USC § 541(a)(6). Thus, the amendment and legislative history do not resolve or address all ambiguities or situations.

Since the trustee holds $2,150 from both post-petition earnings and rent, $630 can be paid to the debtors and $1,520 to the chapter 7 trustee.

DATED: March 12, 1996

HERBERT A. ROSS
U.S. Bankruptcy Judge