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How Changes to the Kansas Form Chapter 13 Plan Impact What is Property of the Bankruptcy Estate

By Justin W. Whitney © 2015

Woner, Glenn, Reeder & Girard, P.A.

 The Form Chapter 13 Plan adopted by the District of Kansas[1] (“the Form Plan”) provides in relevant part as follows:

16.       PROPERTY OF THE ESTATE:

a. In addition to the property specified in 11 U.S.C. § 541, property of this bankruptcy estate includes all property acquired after the filing of the bankruptcy petition, including earnings.  Except as otherwise provided, Debtor will remain in possession of all property of the estate.

b. All property of the estate will vest in Debtor at discharge or dismissal of the case.

NON-STANDARD PROVISIONS FOR ¶ 16:

N/A

The concept of vesting derives from 11 U.S.C. § 1327(b) which provides that “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.”[2] Subsection (c) goes on to state that “the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan.”[3]  This language makes clear that unless modified by the plan or confirmation order, the property of the Chapter 13 bankruptcy estate vests in the debtor at confirmation.  However, courts are divided on what it means for property to “vest” in the debtor and whether the timing for vesting can be delayed from the time of plan confirmation until the time of discharge. 

The diverging interpretations of § 1327(b) were recently summarized by Judge Teel in the United States Bankruptcy Court for the District of Columbia.[4]  Judge Teel explained that:

Courts have adhered to four different approaches.  Some courts have held that when the plan or confirmation order does not provide otherwise, property of the estate retained by the debtor (as opposed to property paid by the trustee) ceases upon confirmation to be property of the estate by reason of § 1327(b). Other courts have held that by reason of 11 U.S.C. § 1306(a), property of the estate acquired by a debtor postconfirmation does not vest in the debtor under § 1327(b).  . . . An alternative view of § 1327(b) is that property of the estate, whether acquired before or after confirmation, does not vest in the debtor and remains property of the estate despite § 1327(b) to the extent it is necessary for the execution of the chapter 13 plan.  Finally, there is a view that although the property of the estate vests in the debtor, it does not cease to be property of the estate until the case is dismissed, closed, or converted.[5]

All of these approaches attempt to define the temporal duration of the Chapter 13 estate. In other words, how long does the Chapter 13 estate stay alive and grow (by virtue of the after acquired property clause in 541(a)(7)) until it closes and terminates such that any subsequent after acquired property belongs to the debtor rather than the Chapter 13 estate? The answer will generally be either when the plan is confirmed or when the case is completed depending on the law that has developed in the jurisdiction.

As will be explained below, this author has found only a handful of decisions with analysis on this issue connected to this jurisdiction.  Pending further guidance from the courts, debtors are free to create their own result by modifying the Form Plan to provide for vesting at confirmation rather than at discharge. The consequences can be good or bad depending on what circumstances befall the debtor during the life of the Chapter 13 case.   Should a Kansas debtor use § 1327(b) to modify the Form Plan to reclaim ownership of his or her property, and subsequently acquired property, at the time of confirmation?  Does the analysis change if the debtor is expecting to receive an inheritance post-petition or has demonstrated a propensity to expose his or herself to post-petition claims?  It is important to know when the Chapter 13 estate closes so that one can evaluate what might come into it while it is open.

Under the Form Plan, if the debtor acquires an inheritance after plan confirmation but before closure of the case, the inheritance will become property of the estate creating an obligation to disclose the inheritance and may require a post-confirmation plan amendment requiring an increased distribution to unsecured creditors.[6] Historically, when an inchoate right held by the debtor ripens into a meaningful asset, the Chapter 13 Trustee will generally negotiate a settlement wherein a portion of the asset can be retained by the debtor and a portion will be paid to unsecured creditors.[7] Even though a post-petition inheritance or a personal injury settlement will normally be property of the Chapter 13 bankruptcy estate, a debtor has leverage to negotiate keeping a portion of the post-petition asset because (1) realization of the asset will require a level of participation and cooperation from the debtor (i.e. testifying at a personal injury trial, etc.); (2) the debtor has the option to dismiss his or her Chapter 13 bankruptcy or convert to Chapter 7 which has the potential to reduce the amount unsecured creditors will ultimately receive; and (3) the debtor may be able to demonstrate that retention of a portion of the asset is necessary in order for debtor to continue performing under the Chapter 13 plan (i.e. for automobile repairs, etc.). 

Also under the Form Plan, property acquired post-confirmation cannot be levied to satisfy post-petition claims. Altering the Form Plan to provide for vesting at confirmation has the potential to change these outcomes.  The risks and rewards should be analyzed on a case-by-case basis. The cases that follow demonstrate how courts in this jurisdiction have sorted through these issues.  This presentation aims to address those issues by surveying the relevant decisions in the District of Kansas and beyond.[8]   

The diverging judicial approaches relevant to vesting are the result of the conflicting language in § 1306(a)’s expansive definition of the Chapter 13 bankruptcy estate and the language providing for vesting at confirmation in 1327(b). 11 U.S.C. 541 provides in relevant part that with regard to all chapters under the Bankruptcy Code, property of the bankruptcy estate includes, among other types of property, all legal or equitable interests of the debtor in property as of the commencement of the case. With regard to Chapter 13 cases, 11 U.S.C. 1306(a) enlarges the bankruptcy estate to include both property identified in 11 U.S.C. 541 and also

(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of [the Code], whichever occurs first . . . .

As mentioned earlier, there is some guidance on this issue in Kansas. The interpretation of 1327(b) with regard to 1306(a) was addressed at the bankruptcy court level in the case of In re Brensing.[9]  The issue was relevant to the question of whether the Three-Year Rule under 507(a)(8)(A)(i) was tolled during a prior bankruptcy by virtue of the IRS being stayed from collecting against property of an earlier Chapter 13 estate. The Brensing’s earlier bankruptcy was filed prior to adoption of the Form Plan and the Brensing’s plan did not include language modifying 1327(b).[10] The Court harmonized 1327(b) and 1306 by interpreting “vesting” as referring to mere control of the property rather than as an ownership concept that removes property from the defined bankruptcy estate.  The Court stated:

Logic is not strained to synchronize the language in § 1306 and 1327(b); these sections are employed in concert.  Section 1327(b) does not operate to remove property of the estate from the bankruptcy estate but merely places control of this estate property in the debtor pending conclusion of the Chapter 13 proceedings.[11]

To the author’s knowledge, Brensing is the only decision by a current Bankruptcy Judge in this District that renders an opinion as to whether the timing of “vesting” could operate to either include or exclude property from the Chapter 13 bankruptcy estate.[12]  Brensing appears to suggest that modifying the Form Plan to provide for vesting at confirmation, as opposed to plan competition, will be inconsequential.  Rather, under Brensing, the Chapter 13 estate is likely to include property acquired by the debtor until the case is completed irrespective of what the plan or confirmation order provides.

Shortly after Brensing, in the unpublished opinion of In re Vannordstrand[13], The Tenth Circuit BAP made note of the contrary approaches relative to vesting but found it unnecessary to the analysis before it because the plan at issue delayed vesting until discharge thereby modifying 1327(b) to be consistent with 1306.[14]  In Vannordstrand, the debtor received an inheritance approximately two years after confirmation of his plan.  The bankruptcy court granted the trustee’s motion for turnover of the inheritance.  The debtor argued to the Tenth Circuit BAP that the inheritance was not property of the estate by virtue of § 541(a)(5) because he did not own it at the commencement of the case nor did he acquire it within 180 days after the filing date.  11 U.S.C. 541(a)(5) provides that in addition to property rights held by the debtor on the filing date, the bankruptcy estate also includes:

Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180
days after such date--
(A) by bequest, devise, or inheritance;

(B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or

(C) as a beneficiary of a life insurance policy or of a death benefit plan. . . .

The BAP noted that 1306(a)(1) expands the Chapter 13 bankruptcy estate to include both the property itemized in § 541 present at the commencement of the case and “all property of the kind specified in § 541 that the debtor acquires after commencement of the case but before the case is closed, dismissed, or converted.”  According to the BAP, courts uniformly agree that 1306 modifies the 180 day limitation in 541 with the result that even the property interests that would only be included in a Chapter 7 bankruptcy estate if acquired within 180 days of the filing date will nevertheless be included in a Chapter 13 bankruptcy estate if acquired at anytime prior to the case being closed, dismissed or converted.[15] According to the BAP, the only way to alter this result could be to provide for vesting at confirmation rather than discharge.  However, the BAP expressed no opinion on that subject.[16]

In the case of In re Davenport[17], the debtors disclosed a 1/6th interest in real estate held at the commencement of the case.  A few years into the plan, the real estate appreciated significantly and the debtors sold their interest in the real estate and spent most of the proceeds without disclosing the sale to the Chapter 13 trustee.  The trustee moved under § 1329(a) for the plan to be modified to increase payments to the unsecured creditors as a result of the influx of proceeds.  The court granted the motion and ordered that the effective date of the modified plan would control for purposes of establishing a hypothetical liquidation value in order to determine if the best interest of the creditors test is satisfied.[18] Here, the plan again delayed vesting until case completion and that fact supported the Court’s finding that the post-petition sale of the real estate constituted property of the estate requiring disclosure and court approval prior to spending.[19]

In the case of Autos, Inc. v. Gowin[20], the debtor acquired a wrongful repossession claim against Autos, Inc. after filing a Chapter 13 bankruptcy but prior to confirmation.[21] Her plan delayed vesting until case completion.[22]  As a result, the Court found that the claim became property of the bankruptcy estate under 11 U.S.C.  § 1306 and would remain property of the bankruptcy estate until case completion.[23]  The Court noted that the debtor had an affirmative duty to formally amend her bankruptcy schedules to reflect the claim she acquired post-petition because the claim constitutes property of the bankruptcy estate.[24]

In the case of In re Wade[25], the debtor’s chapter 13 plan rejected a television lease and the lessor filed a replevin lawsuit seeking a personal judgment against the debtor post-petition without seeking relief from stay.  In its analysis, the Court noted that the debtor’s plan delayed vesting until case completion with the effect being that collection against property of the estate would be barred until case completion under 362(a)(3) with regard to both pre and post petition claims.[26]  If the Form Plan is altered to accelerate vesting, there is a risk that assets owned personally by the debtor during the life of the Chapter 13 bankruptcy are not within the protection of the automatic stay under 362(a)(3) and therefore could be subject to levy or garnishment by creditors holding claims that arose post-petition.

Vesting decisions also will impact what constitutes property of a Chapter 7 estate if the case is later converted to Chapter 7.  11 U.S.C.  348(f)(1)(A) provides that upon conversion from Chapter 13 to Chapter 7:

[P]roperty 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 . . . .

This provision has been interpreted to mean that the Chapter 7 estate includes property owned by the debtor when the original Chapter 13 was filed provided such property is still in the debtor’s possession or control but does not include property that was acquired between the filing date and conversion to Chapter 7.[27]

One court has described the reference in 348(f)(1)(A) to “property of the estate, as of the filing of the petition” as follows:

Merely an acknowledgment that, upon conversion from Chapter 13 to Chapter 7, the bankruptcy estate is to be shed of whatever it had accumulated as post-petition assets under Section 1306 so as to resemble what the converted estate would have looked like had the case been in fact administered from the outset as a Chapter 7 proceeding.[28]

However, 11 U.S.C. 348(f)(2) provides that when a case is converted from Chapter 13 to Chapter 7 in bad faith, the Chapter 7 estate will also include property that the debtor acquired after the filing date and prior to the conversion.[29] Factors relevant to bad faith include wrong-doing, dishonest purpose, ill will, and whether the conversion would result in a windfall to the debtor.[30]

When analyzing the impact of vesting, it is important to have an understanding of exactly when a property interest arises and to also keep in mind that some forms of property are excluded from inclusion in a bankruptcy estate by operation of law.  A distinction is drawn between vested rights and a mere expectancy.  Non-probate transfers (aka will-substitutes) such as a beneficiary designation in a retirement plan, a beneficiary of a POD account, TOD account or TOD deed and a beneficiary under a revocable inter vivos trust constitute only a mere expectancy rather than a vested right because the interest can be divested by depletion, revocation or by changing the beneficiary.[31] In the Chapter 7 case of In re Hall[32], Linda Hall’s father died 18 days after the case was filed entitling her to receive certificates of deposit, real estate, bonds, life insurance proceeds, and an IRA by virtue of her status as a payable on death beneficiary.[33] In affirming the bankruptcy court, the BAP stated:

POD accounts, TOD accounts, and TOD deeds, as well as revocable inter vivos trusts, are all devices frequently utilized in estate planning as “will substitutes”.  Further, interpretation of the terms “bequest, device, and inheritance” to include only property passing pursuant to will or intestate succession, but not other more modern methods of transferring property on death, may appear to exalt form over substance.  However, we are required to presume congress intended for the courts to apply the plain language of the statute unless such interpretation would lead to an absurd result.[34]

The court in Hall found that an expectancy interest arising from one of these interests is outside the scope of 11 U.S.C. 541 and not property of the bankruptcy estate even if it develops into a vested right during the 180 day period following the filing date.[35]  

There is also case law in this jurisdiction providing that a beneficial right under a trust that became a vested right prior to the filing date will generally be excluded from becoming property of the bankruptcy estate if it is subject to a valid spendthrift provision.[36] However, a spendthrift provision does not bar inclusion of a beneficial trust interest from becoming property of the estate if the trust has terminated.[37]  In light of Hall, it seems clear that a property interest acquired by intestate succession is a mere expectancy interest until the death of the intestate decedent.  In contrast, an interest arising by bequest remains a mere expectancy until the time that the will is admitted to probate.[38] Once an expectancy becomes a vested right by virtue of the death of a decedent or the admission of a will to probate, such vested right under a will, intestate succession or life insurance policy will be included in the bankruptcy estate by virtue of § 541 if the right vests pre-petition or within 180 days of the filing date in Chapter 7 or until the time that the bankruptcy estate terminates in a chapter 13.[39] With regard to life insurance proceeds if the interest becomes part of the bankruptcy estate, the proceeds should be immediately claimed as exempt.[40]

Absent a modification to paragraph 16 of the Form Plan, property of the Chapter 13 bankruptcy estate includes property held by the debtor at the commencement of the case plus property that the debtor acquires during the interval between the filing date and completion of the case.  If the Form Plan is modified to provide for vesting at the time of plan confirmation, any dispute that arises during the life of the plan as to whether property acquired post-petition is property of the bankruptcy estate is likely to be an issue of first impression in this District.  The upside to a debtor in having the Chapter 13 bankruptcy estate continue until the time of case completion is that the debtor’s property acquired before and after the filing date has the protection of the automatic stay and cannot be executed against to satisfy post-petition claims. The down side is that if the debtor acquires a windfall post-petition, such as an inheritance, then the subsequently acquired property may be used to increase the dividend to unsecured creditors. Finally, any rights acquired by the debtor post-petition should be analyzed carefully for consideration as to whether such property right is within the scope of 11 U.S.C. 541.  Many of the popular estate planning instruments are capable of transferring rights that are excluded as a matter of law from a Chapter 13 bankruptcy estate.       



[1] See D. Kan. Bk. S.O. 12-1.

[2] 11 U.S.C. § 1327(b) (emphasis added).  § 1322(b)(9) provides that a plan may provide for vesting of property of the estate at confirmation or at a later time in the debtor.

[3] Id.

[4] In re Henneghan, 2009 Bankr. LEXIS 2553 (Bankr. D. D.C. June 15, 2009) (unpub).

[5] Id. at * 7-8 (internal citations omitted).

[6] See generally In re Vannordstrand, 2007 Bankr. LEXIS 210 (10th Cir. BAP 2007) (unpub.).

[7] See In re Rodriguez, Case No. 10-41973, Doc. # 87 (Bankr. D. Kan. April 22, 2013) (approving settlement between debtor and Chapter 13 Trustee to divide post-petition personal injury settlement 50% to debtor and 50% to unsecured creditors).

[8] Judge Posner has even weighed in on the issue writing on behalf of the Seventh Circuit that “the two sections, 1306 (a)(2) and 1327(b), to mean simply that while the filing of the petition for bankruptcy places all the property of the debtor in the control of the bankruptcy court, the plan upon confirmation returns so much of that property to the debtor’s control as is not necessary to the fulfillment of the plan.” In re Heath, 115 F.3d 521, 524 (7th Cir. 1997).

[9] 337 B.R. 376, 383-85 (Bankr. D. Kan. January 24, 2006) (J. Berger).

[10] Id at 383.

[11] Id.

[12] But see In re Richards, 283 B.R. 783 (Bankr. D. Kan. 2002) (J. Flannagan) (life insurance proceeds received 14 months after Chapter 13 filing date were excluded from property of estate because ownership of estate property vested in debtors at confirmation under 1327(b)); In re Gyulafia, 65 B.R. 913 (Bankr. D. Kan. 1986) (confirmation vested property in the debtor). See also In re Talbot, 124 F.3d 1201, 1207 (10th Cir.1997) (“because the Trustee does not contest the premise that § 1327(b)’s vesting provision operates to grant ownership rights, this court need not address the issue.”).

[13] 2007 Bankr. LEXIS 210 (10th Cir. BAP 2007) (unpub.).

[14] “The disputed issue is whether or not the “vesting” of estate property in the debtor acts to terminate § 1306’s inclusion of post-petition acquired property in the estate.  This Court need not enter this debate, since the Debtor’s plan specifically delays vesting, stating that [p]roperty of the estate shall vest in the debtor upon discharge hereunder.” Id at *5-6.

[15] Id at *5.  See also In re Carroll, 735 F.3d 147, 151-152 (4th Cir. 2013) (“the overwhelming majority of courts to have addressed this issue agree that 1306 modifies the § 541 time period in Chapter 13 cases.”).

[16] Id.

[17] 2011 Bankr. LEXIS 4804 (Bankr. D. Kan. Dec. 7, 2011) (J. Karlin).

[18] Id at * 9. Citing with approval to In re Aernheimer, 437 B.R. 405 (Bankr. D. Kan. 2010) (C.J. Nugent).  See also In re Self, Case No. 06-40228, Doc. # 136 (Bankr. D. Kan. 2006).

[19] Id at * 14.

[20] 330 B.R. 788 (D. Kan. Sept 8 2005) (J. Crow).

[21] Id at 791.

[22] Id at 793.

[23] Id.

[24] Id at 794.

[25] 501 B.R. 870 (Bankr. D. Kan. Dec. 5, 2013 (Nugent, C.J.).

[26] Id at 876.

[27] In re Weddington, 457 B.R. 102, 116 (Bankr. D. Kan. Sept. 7, 2011) (Nugent, C.J.) (“Absent bad faith, pre-conversion property acquired by the debtor during the chapter 13 is not included in the chapter 7 estate.”).

[28] In re Brown, 375 B.R. 362, 381 (Bankr. W.D. Mich. 2007).

[29] Weddington, 457 B.R. 102 at 116.

[30] Id.

[31] In re Hall, 441 B.R. 680, 689-691 (10th Cir. BAP Dec. 4, 2009).

[32] 441 B.R. 680 (10th Cir. BAP Dec. 4, 2009).

[33] Id at 681.

[34] Id at 689.

[35] Id at 691 (“We agree with the Bankruptcy Court that whatever rights L. Hall had in the Assets as of the petition date are not legal or equitable interests in property as  contemplated by § 541 (a)(1).  Rather, we view them as more akin to a mere expectancy.  This is because any claim L. Hall had to the Assets was subject to divestment at any time during her father’s life in a myriad of ways, including depletion, transfer, assignment, and change of beneficiary.”).

[36] See In re Robben, 502 B.R. 572 (Bankr D. Kan. Dec. 17, 2013); In re Roth, 289 B.R. 161 (Bankr. D. Kan. Feb. 10, 2003).

[37] In re Hilgers, 371 B.R. 465 (10th BAP 2007).

[38] KSA 59-616 (“No will shall be effectual to pass real or personal property unless it shall have been duly admitted to probate.”); In re Olson, 39 B.R. 872, 874 (Bankr. D. Kan. 1984) (“property passed to the debtor . . . when the will was admitted to probate.”); In re Estate of Zimmerman, 207 Kan. 354, 357 (Kan. 1971) (“[W]e consider the contention that Charles became vested with an interest at the date of Abbie’s death to be untenable.  No title could vest in Charles by virtue of Abbie’s will, because her will was not probated.”).

[39] K.S.A. 59-502 (“the property of a resident decedent, who dies intestate, shall at the time of death pass by intestate succession as provided in this article.”).  See also Peterson v. Peterson, 173 Kan. 636, 639-640 (Kan. 1952) (“On the death of an intestate the lands descend, as at common law to his heirs, who may maintain ejectment against third persons if the administrator has not taken possession; the administrator takes neither title nor interest in the land except the mere right to take possession during administration. . . . By law the whole of an estate vests in the heirs, testate or intestate, at the death of an ancestor.  It passes from them sub modo for the purposes of administration, and the administration is required to be speedy, so that the remainder, if any, may be returned to its real owners.”).

[40] In re Hall, 394 B.R. 582, 593 (Bankr. D. Kan. Aug. 21, 2008) (J. Karlin) (debtors who acquire post-petition property are require to file a supplemental schedule concerning such property). See also K.S.A. 40-414.