Category Archives: Inheritance and Bankruptcy

Can I Keep An Increase In Income Inheritance and Increases In Equity In My House After Filing Chapter 13 Bankruptcy?

By Ryan C. Wood

Maybe, maybe and yes are the short answers.  Whether the chapter 13 is confirmed or approved is very important.  Below is the relevant law and Bankruptcy Code sections governing these issues when filing a chapter 13 bankruptcy case. 

Income Increases or Windfall of Income After You Confirm Your Chapter 13 Plan

A recent Ninth Circuit Bankruptcy Appellate Panel decision was published addressing this issue. 

In re Steven William Berkeley, BAP No. NC-19-1197-FBTa (April 17, 2020) 

Like many things in life timing is everything.  For Mr. Berkeley he was blessed with owning stock and then receiving $3.8 million from the stock when the company he worked for was purchased. In the real world how wonderful. In the bankruptcy world wait a minute.  The problem was the $3.8 million was received around the 57 month of the 60 month chapter 13 plan.  Mr. Berkeley only had 3 months to go and in theory he could have kept the entire $3.8 million from the stock; in theory. When the chapter 13 case was filed he was getting paid $50,000 a year.  After the chapter 13 plan was confirmed or approved by the Court he received stock options in the company he worked for.  That company was bought out resulting in Mr. Berkeley receiving the $3.8 million.  When something like this comes up notifying the chapter 13 trustee is generally recommended for proper disclosure even if you believe the windfall is not part of the bankruptcy estate.  The trustee’s office in this case argued this increase of income, or windfall, should to go the benefit of his creditors while Mr. Berkeley argued he should not have to pay any of the $3.8 million to creditors.  The lower Bankruptcy Court agreed with the chapter 13 trustee and Mr. Berkeley appealed.  The Ninth Circuit BAP affirmed the lower Bankruptcy Court’s holding that the income derived from the stock options was an increase in income and a change in circumstances.  This means the chapter 13 plan can be modified post-confirmation pursuant to Section 1329 of the Bankruptcy Code to increase the chapter 13 plan payout to creditors.  In this case Mr. Berkeley will have to pay $202,000 into the chapter 13 plan and pay 100% of his debt now.  Prior to this windfall Mr. Berkeley was paying back 1% of his nonpriority general unsecured debts.

Section 1329(a) provides that, “[a]t any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified” to “increase or reduce the amount of payments on claims of a particular class provided for by the plan[.]” § 1329(a) of the Bankruptcy Code.

Increases in income can be captured by creditors by filing a motion to modify the confirmed chapter 13 plan.  Danielson v. Flores (In re Flores), 735 F.3d 855 (9th Cir. 2013) 

Of course the motion to modify can be opposed by the bankruptcy filer and their bankruptcy attorney.  It is within the Court’s discretion whether the motion to modify is granted or not.  In this appeal Mr. Berkeley was arguing the Bankruptcy Court abused its discretion by granting the motion to modify to include the $3.8 million. 

A wrinkle is the revesting of property of the bankruptcy estate upon confirmation of the chapter 13 plan.  The revesting of the bankruptcy estate to the debtor terminates the bankruptcy estate.  This is true, but

Increase In Value of Houses or Real Property During A Chapter 13 Bankruptcy Case 

In a recent Ninth Circuit Bankruptcy Appellate decision, Black v. Leavitt (In re Black), 609 B.R. 518 (9th Cir. BAP 2019), the Ninth Circuit BAP held and reaffirmed that the estate terminates at confirmation.  The Court provide that “the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any post-petition appreciation.”  This means a chapter 13 bankruptcy filer can after confirmation of their chapter 13 plan sell their house, keep the equity, and continue with the chapter 13 plan payments to fulfill their obligation under the confirmed terms of the plan or payoff the chapter 13 plan and receive their discharge early.  This issue has been more of a problem when a chapter 13 is converted to chapter 7.  Section 348 of the Bankruptcy Code, Effect of Conversion, governs this issues though and the plain language of Section 348(f)(2) is not ambiguous regarding this issues.  Section 348(f)(2) provides: (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 of the estate in the converted case shall consist of the property of the estate as of the date of conversion.”  If for some reason it is determine the conversion from chapter 13 to chapter 7 is in bad faith, then and only then, is the property of the estate what exists at the time of conversion.  Otherwise property of the bankruptcy reverts back to the original date the chapter 13 case was filed.  This has been a major issue when converting from chapter 13 to chapter 7 and overzealous chapter 7 trustees seeking to sell homes upon conversion to chapter 7. 

The problem is the misunderstood language in Section 348(f)(1)(B).

Section 348(f)(1) provides: 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; (B) valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under chapter 11 or 12, but not in a case converted to a case under chapter 7, with allowed secured claims in cases under chapters 11 and 12 reduced to the extent that they have been paid in accordance with the chapter 13 plan; and

So 348(f)(1)(A) first provides the property of the estate consists of property of the estate, as of the date of the filing of the petition, original petition, that remains of or is under the control of the debtor on the date of conversion; consistent and the same as 348(f)(2).  The wrinkle and misunderstood language is underlined above regarding valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under Chapter 11  or Chapter 12, but not in a case converted to a case under chapter 7.  Valuations mean valuations of purposes of reducing the amount a secured creditors claim as part of the plan of reorganization.  In plans of reorganization a secured creditors claim is only secured up to the value of the collateral.  We routinely file motions to value property pursuant to Section 506 of the Bankruptcy Code to reduce the amount of a secured claim to the value of the collateral, not what was owed at the time the case was filed.  A motion to value a car results in a valuation of the car paid via the plan of reorganization.  If the valuation is ordered before the conversion to another chapter that is a reorganization chapter, such as chapter 11 or chapter 12, naturally and according to 348(f)(1)(B) above you would not have to file another motion to value the same collateral.  The valuation already determined would be applicable for purposes of the chapter 11 plan or chapter 12 plan.  However, chapter 7 is not reorganization of debts but liquidation.  So the valuation previously obtained would not be apply in the chapter 7 liquidation.  This unfortunately is mistakenly interpreted as the value of a house in a chapter 13 case is not the value to be used in a case converted from chapter 13 to a chapter 7.  The value of a house  reverts back to when the case was filed when a chapter 13 plan is confirmed and then the case is converted to chapter 7, unless pursuant to Section 348(f)(2) the conversion was in bad faith.  It is all there and makes perfect sense.  Many bankruptcy attorneys fail to understand this dynamic and chapter 7 and judges do not given understand given they have not practiced chapter 13 bankruptcy prior to becoming a chapter 7 trustee or judge.  It is a huge problem.

Inheritance Received After Chapter 13 Case Commenced 

First we must start with the Bankruptcy Code.

Section 541(a)(5) provides in relevant part: (a) The commencement of a case under . . . this title creates an estate.  Such estate is comprised of all the following property, wherever located and by whomever held: . . . . (5) 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.

But then in addition for Chapter 13 case we have Section 1306(a)(1) to consider which provides: (a) Property of the estate includes, in addition to the property specified in section 541 of this title (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 this title, whichever occurs first.

So does the language in Section 1306 expand the 180 day limitation provided in Section 541(a)(5)?  Courts have overwhelming said yes based upon the legislative history.  So property of the estate in a chapter 13 case is expanded to include property specified in section 541 but without any of the timing limitations.  In a chapter 13 case property of the estate includes property of the kind specified in Section 541 after the commencement of the chapter 13 case but before the chapter 13 case is closed, dismissed or converted to chapter 7, 11 or 12; whichever occurs first as provided above in Section 1306(a).

This issues boils down to statutory interpretation as well.  Section 541 is a general provision governing bankruptcy case while Section 1306 is a specific section dedicated to chapter 13 bankruptcy cases.  If the big umbrella of Section 541 already blocks the rain, the 180 day period, how does the Section 1306 umbrella even get rain that is already blocked and become relevant as to this issue?  I argue that Section 1306 incorporates the 180 day limitation.  So Section 1306 makes the limitation in Section 541 meaningless.  The 180 day limitation and other such limitations are to prevent bankruptcy filers from gaming the system or timing the bankruptcy filing to not include an asset such as inheritance.  If someone knows they have a sick family member and they will receive inheritance timing the bankruptcy is difficult or not possible given the 180 day limitation.  The 180 day limitation is to prevent abuse.  This goal of Section 541 is now rendered meaningless in chapter 13 cases?  

What Not To Do If You Know You Will Receive A Significant Inheritance When Filing Bankruptcy


The definition of property of the estate under Section 541 of the Bankruptcy Code is very broad. So if you know you are going to get a significant inheritance why file bankruptcy? Like everything I guess “significant” could mean something different depending upon the circumstances. If you only have $50,000 in debt and know you will receive $100,000 from someone’s estate that has already passed, that is a significant inheritance in my opinion. An argument could be made for still filing for bankruptcy protection, but be careful. The inheritance is part of the bankruptcy estate, must be disclosed and held for the benefit of your creditors if you file bankruptcy. The following is a rundown of what not to do if you know you will receive a significant inheritance when filing bankruptcy. This Ninth Circuit Bankruptcy Appellate Panel case deals with what happened to a debtor that received a significant inheritance right before filing for bankruptcy protection in the Bankruptcy Court for the Southern District of California. See: Jason Scott Brown v. Thomas H. Billingslea, Jr., Chapter 13 Trustee; 9th Cir. BAP No. SC-14-1388-JuKlPa. After discussing the initial Chapter 13 bankruptcy filing and then Mr. Brown’s appeal, this article concludes with what is currently taking place after this appeal (spoiler alert) in the Chapter 7 case. What did the Chapter 7 Trustee do upon conversion for the benefit of Mr. Brown’s creditors?

In this case the debtor, Jason Scott Brown, filed a Chapter 13 Bankruptcy petition on December 13, 2013, three days before the closing of the sale of a property he inherited when his father, Herbet D. Brown, who passed away July 20, 2012. The sale of the inherited property closed on December 16, 2013, and Mr. Brown received $65,812 in proceeds. I do not really know why Mr. Brown filed for bankruptcy knowing he was entitled to over $65,000 from the sale of the property. I will not begin to speculate because there may be a very legitimate and reasonable reason why. I just do not know what it is. What I do know is what happened next in his Chapter 13 bankruptcy case. Mr. Brown represented in his Schedule B that he was only going to receive $2,500 in inheritance and his Schedule F listed $33,499 in general unsecured debts. Also upon receiving the probate funds Mr. Brown did not amend his schedules.

At the Section 341 meeting of the creditors the Chapter 13 Trustee and Mr. Brown entered into a pre-confirmation modification of the Chapter 13 Plan requiring Mr. Brown to turn over to the trustee for the benefit of his creditors $3,224 in probate proceeds within 45 days of receiving the funds. Why $3,224 instead of the $2,500 he listed in this schedules is unknown. At some point the Chapter 13 Trustee found out about the actual amount of the proceeds Mr. Brown was receiving from the sale of his deceased father’s house via probate. In April 2014 the Chapter 13 Trustee moved for dismissal of the case and objection to confirmation arguing that $37,569 should be turned over to the trustee for the benefit of unsecured creditors.

The Chapter 13 trustee’s objection to confirmation included documents from the probate proceeding and sale of the house. Again for some unknown reason Mr. Brown’s brothers assigned him their beneficial interest in the inheritance from their father’s estate on August 7, 2013. At some point in May 2014, Mr. Brown changed Bankruptcy Lawyers and immediately amended his schedules to allege his share of his father’s estate was only $12,372 and fully exempt from creditors. Mr. Brown alleged that his three brothers were each entitled to 25% of the inheritance. After some more legal wrangling the Chapter 13 Trustee also requested the case be converted to Chapter 7 given Mr. Brown did not disclose the inheritance and this was an abuse of the bankruptcy process. See: Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 767 (9th Cir. 2008).

In another strange turn of events, Mr. Brown’s Bankruptcy Attorneys on his behalf on June 17, 2014, filed a status report telling the court that Mr. Brown misunderstood that the inheritance was property of the bankruptcy estate. Therefore to make it right Mr. Brown would pay 100% of his unsecured debts in the Chapter 13 Plan after objecting to a claim of a creditor. See section below about the Chapter 7 case regarding this objection to claim.

At the hearing on the Chapter 13 Trustee’s objection to confirmation on July 8, 2014, Mr. Brown informed the court that his part of the inheritance was put into his business and the rest of the inheritance as paid in CASH to two brothers and by check to a third brother. At this hearing the Bankruptcy Court noted that given the source of payment for creditors, the inheritance was gone, continuing to pursue Chapter 13 reorganization was not in good faith. The Bankruptcy Court also found based upon the facts that cause existed to convert the Chapter 13 case to Chapter 7 so that a Chapter 7 Trustee could seek return of the inherited funds via fraudulent transfer or transfer avoidance powers for the benefit of creditors. Mr. Brown timely appealed the conversion of his case to Chapter 7.

Cause To Convert The Case To Chapter 7

On appeal the Ninth Circuit Bankruptcy Appellate Panel found the Bankruptcy Court’s finding of cause was not clearly erroneous. The Ninth Circuit BAP also noted that Mr. Brown’s appeal focused on the fact that Mr. Brown proposed a 100% Chapter 13 Plan and not that the Bankruptcy Court’s findings were erroneous. Also cleverly noted is that Mr. Brown never actually filed an amended plan or motion to modify the confirmed chapter 13 plan to pay creditors 100%. Mr. Brown only orally alleged he would propose a 100% chapter 13 plan upon objecting to a creditor’s claim. If successful with the claim objection Mr. Brown “believed” he would be able to pay unsecured creditors 100%. How could this be possible though? Mr. Brown’s income was only social security and was not sufficient to fund a 100% Chapter 13 Plan and he used and gave away all of the inheritance . . . . so.

The 9th Circuit BAP also noted that Mr. Brown’s case was pending for seven months and Mr. Brown could have paid all of his unsecured creditors in full with the inheritance and did not even though the Chapter 13 Trustee requested him to turn over the inherited funds. Mr. Brown instead used the inheritance for his business and paid the inheritance to his brothers. Mr. Brown’s creditors suffered prejudice from the loss of the money.

Conversion of the Chapter 13 to Chapter 7

A case can be converted to Chapter 7 for cause, including the failure to make Chapter 13 Plan payments. In Mr. Brown’s case he did not pay the Chapter 13 Trustee the $3,224 of the inheritance he agreed to turn over in the pre-confirmation modification agreement he signed. Section 1307(c)(4) applies to debtors when Chapter 13 Plan payments commence and then the debtor pays less than what the Chapter 13 Plan on file requires. See: In re Mallory, 444 B.R. 553, 558 (S.D. Tex. 2011) (citing In re Jenkins, 2010 WL 56003, at *2 (Bankr. S.D. Tex. Jan. 5, 2010). Mr. Brown argued he did not turn over the $3,224 on advice of this counsel.

Lack of Good Faith

The Bankruptcy Court found two factors of lack of good faith by Mr. Brown: (1) that Mr. Brown misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his petition or plan in an inequitable manner, and (2) there was a presence of egregious behavior. In response Mr. Brown argued he never misrepresented facts in this petition or plan and he disclosed the inheritance to the court. The Ninth Circuit Court of Appeals discussed two cases: (1) Marrama v. Citizens Bank of Mass., 549 U.S. 365, 368 (2007) and (2) In re Rosson, 545 F.3d at 771; Levesque v. Shapiro (In re Levesque), 473 B.R. 331, 336 (9th Cir. BAP 2012).

In Rosson the debtor communicated to the Bankruptcy Court that he was going to receive a large arbitration award to fund his Chapter 13 Plan. When Rosson received the award he did not turn over the funds to the Chapter 13 Trustee and the Bankruptcy Court found Rosson was rebelliously horsing around with bankruptcy estate assets and therefore converted the Chapter 13 case to Chapter 7. Rosson then tried to voluntarily dismiss his Chapter 13 case and the Bankruptcy Court denied the motion. The decision was affirmed upon appeal.

In Marrama the debtor filed a Chapter 7 bankruptcy case and allegedly misrepresented the value of a piece of real property in Maine and denied transferring the property into a trust for no value during the year prior to filing Chapter 13 to protect the property from his creditors. After the debtor admitted to the above improprieties he requested conversion to Chapter 13. His main creditor objected saying the conversion was in bad faith. In Marrama the debtor argued the information provided incorrectly about the Maine property were due to scrivener’s error and that now that he is employed he was eligible to proceed under Chapter 13. The Bankruptcy Court denied conversion to Chapter 13.

Mr. Brown on appeal tried to argue his facts are not like those in Rosson or Marrama. The 9th Circuit BAP was not convinced. They provide the following in support of a finding of bad faith:

– Mr. Brown’s failure to provide an accounting of the inheritance funds was bad faith;
– Mr. Brown’s explanation for disbursing the funds to his brothers, but found that his explanation did not justify his actions when the Chapter 13 Trustee had made demands on Debtor to place the funds in Trustee’s lockbox account or deposit the funds in his counsel’s client trust account;
– Evidence showed that Mr. Brown already had the proceeds from the sale of his father’s house at the time he filed his schedules but Mr. Brown disclosed that he anticipated receiving only $2,500 from the probate estate. There is no explanation in the record from Mr. Brown as to how he came up with the $2,500 number;
– Mr. Brown claimed his brothers were entitled to 75% of the inheritance but his brothers had filed waivers of their beneficial interests with the probate court.

Best Interest of Creditors

Another factor of consideration is the best interest of creditors when converting or dismissing a case. Mr. Brown argues that now that there are no inheritance funds to distribute to creditors the case should remain a Chapter 13 case and allow Mr. Brown to pay creditors via the Chapter 13 plan. The Bankruptcy Court correctly originally noted Mr. Brown’s income was not sufficient to fund a 100% Chapter 13 Plan and the inheritance was gone. On appeal the Ninth Circuit Bankruptcy Appellate Panel noted there was no court order allowing Mr. Brown to dispose of the inheritance. Under Section 348(f)(1)(A) Mr. Brown argues that the inheritance has been eliminated from the bankruptcy estate therefore making the Chapter 7 case a “no asset” case.

This is a strange argument given that if it were true, then any Chapter 13 debtor could file Chapter 13 after disposing property of the bankruptcy estate fraudulently, then convert to Chapter 7 and creditors would get nothing? Mr. Brown is making this argument in an attempt to remain in Chapter 13 and not face being sued for fraudulent transfer of the inheritance or have his brother’s potentially sued for the turnover of the inheritance funds their received by the Chapter 7 trustee upon conversion. That is the whole point in converting the case really. Chapter 13 Trustee’s traditionally do not seek to avoid fraudulent or preferential transfers of assets. The 9th Circuit Bankruptcy Appellate Panel provides Section 348(f)(1)(A) is not a “safe harbor” for debtors that fraudulently dispose of property of the bankruptcy estate while in Chapter 13. See: Wyss v. Fobber (In re Fobber), 256 B.R. 268, 279 (Bankr. E.D. Tenn. 2000).

Mr. Brown also argues that upon dismissal creditor would be free to collect against Mr. Brown from his potential assets. Mr. Brown is arguing creditors would be worse off with conversion to Chapter 7. More or less Mr. Brown wants to stay in Chapter 13 and try and pay his creditors via the Chapter 13 Plan 100%. The problem again is that Mr. Brown’s income is not sufficient to pay creditors 100% and Mr. Brown never actually filed a motion to modify his plan to pay creditors 100% of the allowed claims. The Ninth Circuit BAP noted there is no evidence that Mr. Brown’s creditors would receive any prompt payment if the Chapter 13 case was dismissed and held there was no error in Bankruptcy Court’s conversion to Chapter 7.

Absolute Right To Dismiss Chapter 13 Case

There kind of used to be an absolute right to dismiss a Chapter 13 case. Section 1307(b) provides: On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable. There was a split in authority between different circuit courts whether this was an absolute right. In cases where there was improper conduct of the debtor some circuit courts held a debtor should not be able to dismiss the Chapter 13 case. In other circuits court held that Section 1307(b) does not provide for a good faith or bad faith component but says on request of the debtor at any time the court shall dismiss a case. The 9th Circuit BAP cites In re Rosson, 545 F.3d at 771, 774. The right to convert pursuant to Section 1307(b) is not absolute but a qualified right to prevent an abuse of the process pursuant to Bankruptcy Code Section 105(a). Section 105(a) provides: The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

The bankruptcy court is after all a court of equity or fairness. So, it is not fair to creditor or the bankruptcy process to make misrepresentations in your schedules, mislead the bankruptcy court and trustee, or dispose of bankruptcy estate assets without permission of the court and then try and voluntarily dismiss your Chapter 13 case.

So What Took Place In The Chapter 7 Case After Conversion?

Well first of all, something that was not brought up in the appeal, Mr. Brown on September 9, 2014, filed an objection to the claim they mentioned in their argument to stay in the Chapter 13 case and pay creditors 100%. On October 27, 2014, Mr. Brown then filed an amended objection to the claim to correct a problem in the first objection to the claim. Mr. Brown was arguing that if this claim was not allowed then he could pay his creditors 100% and the case should not be converted. The objection is meaningless given the case was converted to Chapter 7 and Mr. Brown lost the appeal. The Chapter 7 trustee will now object to claims if there are grounds to object. I just thought it interesting that Mr. Brown in fact filed the objection to the claim.

On October 14, 2014, Santander filed a motion for relief from stay to request permission from the Bankruptcy Court to repossess Mr. Brown’s 2008 Dodge Caravan for his failure to make the monthly vehicle loan payments. This is a problem when a Chapter 13 case is converted the Chapter 7. In some Chapter 13 cases the monthly vehicle loan payment is paid through the Chapter 13 Plan. Some plans call for payments on the vehicle loan before a Chapter 13 Plan is approved by the court and then the Chapter 13 Trustee makes payments to the vehicle loan company. So in Mr. Brown’s case he either stopped making his vehicle loan payments or while his Chapter 13 case was pending for the last ten months Santander did not receive any payments from the Chapter 13 Plan. On November 5, 2014, the Bankruptcy Court granted the motion for relief from stay giving Santander permission to repossess their collateral, the 2008 Dodge Caravan.

On April 21, 2015, after conclusion of the Section 341 meeting of the creditors the Chapter 7 Trustee, Christopher Barclay, filed his notice of abandonment of property of the bankruptcy estate. One of the arguments on appeal by Mr. Brown was that in the Chapter 7 case there would be no assets to distribute to creditors and the Chapter 7 case would therefore be a “no asset” case so the case should remain in Chapter 13. The filing of the notice of abandonment of property of the estate kind of confirms there are no assets. The Chapter 7 Trustee did not abandon the bankruptcy estates claim against Mr. Brown for transferring the inheritance or Mr. Brown’s brothers that received the inheritance.

Chapter 7 Adversary Proceeding

On May 19, 2015, the Chapter 7 Trustee filed an adversary lawsuit against Mr. Brown and his three brothers for conversion and requesting punitive damages, objecting to Mr. Brown receiving a discharge and/or revocation of discharge pursuant to Sections 727(a)(2(A), 727(a)(2)(B), 727(a)(3), 727(a)(4), 727(a)(5) and 727(c). The adversary lawsuit also seeks avoidance of the post-petition transfer of the inheritance pursuant to Section 548 of the Bankruptcy Code. Adversary Case No. 15-90085-MM. As for timing, remember the appeal was filed on August 12, 2014, and the court entered the order converting the case to Chapter 7 on July 28, 2014. The Ninth Circuit Bankruptcy Appellate Panel entered their decision on October 26, 2015, affirming the bankruptcy’s conversion of the case to Chapter 7. Sometimes an adversary lawsuit will be stopped or stayed due to an appeal being filed. In this case the court held the adversary lawsuit should continue regardless of the appeal.

Motion to Dismiss Adversary Proceeding

On June 19, 2015, the three Brown brothers, Cutis, Kenneth and Christopher filed a motion to dismiss the adversary lawsuit against them alleging that the claims against them of the bankruptcy estate do not exist upon conversion to Chapter 7 pursuant to Section 348(f)(1)(A) of the Bankruptcy Code. Mostly the motion to dismiss alleges deficiencies in the timing of the adversary complaint and its causes of action.

Subsequent First Amended Adversary Complaint

On June 29, 2015, the Chapter 7 Trustee filed a first amended complaint and reply to the Brown Brother’s motion to dismiss the case. On July 27, 2015, the Brown Brother’s filed an answer to the first amended complaint filed against them. On August 4, 2014, the debtor, Jason Brown, filed an answer to the first amended complaint. Again, note the appeal was not decided until October 26, 2015.

So, as of right now the debtor, Jason Brown, and his three brother’s motion to dismiss the adversary complaint were denied by the court and the appeal failed to undo the conversion to Chapter 7. The Chapter 7 case will continue and so will the adversary lawsuit. The discovery deadline, the process of obtaining evidence, is January 21, 2016 and the next status conference hearing in the case is scheduled for January 16, 2016, at 10:00 a.m.

To Sum This Case Up So Far

Mr. Brown received over $50,000 in inheritance and had under $40,000 in general unsecured debts. As a result of choosing to not pay his unsecured creditors in full in the original Chapter 13 case or negotiate settlements with his creditors with lump sum cash payments from the inheritance outside of bankruptcy, Mr. Brown had to fight about the terms of his chapter 13 plan, litigated the conversion of this case to chapter 7 and lost, filed and lost an appeal regarding the conversion to Chapter 7 and is now having to litigate his alleged fraudulent transfer of the inheritance to his three brothers. Mr. Brown is also facing not receiving a discharge at all in the Chapter 7 case and more or less getting nothing from having filed bankruptcy to begin with. To really put the cherry on top the Chapter 7 Trustee is seeking punitive damages to punish Mr. Brown for his alleged misconduct via conversion. By my estimation Mr. Brown, not counting his three brother’s mounting legal fees, Mr. Brown may have incurred over $20,000 in attorneys’ fees and costs already and the adversary lawsuit is not over yet. At what point will the attorneys’ fees and costs exceed the original inheritance received by Mr. Brown?

What Happens if I Receive an Inheritance During my Chapter 13 Bankruptcy Case?

By Ryan C. Wood

If you become entitled to receive an inheritance during your bankruptcy case the inclusion of the inheritance into your bankruptcy estate depends on what chapter of bankruptcy protection you are filing under. Becoming entitled unfortunately someone close to you passed away after your case was filed. If you are entitled to receive an inheritance within 180 days of filing a Chapter 7 bankruptcy case the inheritance will be included into your bankruptcy estate. Please note this is if you are entitled to receive the inheritance within this time frame. This means that someone passes away and leaves you with an inheritance. You must contact your bankruptcy lawyer and/or the Chapter 7 trustee and inform them you have become entitled to an inheritance. It does not mean that you actually have to receive this inheritance during this time frame as a lot of times it takes at least several months or even years to actually receive the inheritance. If you are entitled to receive the inheritance 181 days after the filing of your Chapter 7 bankruptcy petition it is not part of your bankruptcy estate and you can receive the inheritance free and clear from your creditors pursuant to the discharge in your Chapter 7 case.

What About in a Chapter 13 Bankruptcy Case?

So what happens if you are entitled to receive an inheritance during a Chapter 13 bankruptcy case? Different jurisdictions may have different outcomes so you need to consult with a bankruptcy attorney in your area to see how your inheritance will be treated. In a recent Fourth Circuit appellate case, Carroll v. Logan (In re Carroll), No. 13-1024 (4th Cir, October 28, 2013), the court decided that inheritances acquired after the 180 day period but before the bankruptcy case is closed becomes part of your bankruptcy estate.

In the Carroll case, Mr. & Mrs. Carroll filed for Chapter 13 bankruptcy protection in February 2009. They were complying with the terms of their Chapter 13 plan and made the Chapter 13 payments. In December 2011, Mr. Carroll’s mother passed away. Mr. & Mrs. Carroll notified the court in August 2012 that Mr. Carroll was anticipating an inheritance of about $100,000. The Chapter 13 trustee moved the court to modify the Carrolls’ Chapter 13 plan to include the inheritance. The bankruptcy court agreed with the trustee and the Carrolls’ appealed the case to the 4th Circuit. The 4th Circuit states that 11 U.S.C 541(a)(5) includes interest in property that bankruptcy filers are entitled to acquire within 180 days (of the filing of the bankruptcy case) received by bequest, devise, or inheritance. The court then went on to state that 11 U.S.C. §1301(a) expands §541 by indicating that all property indicated in §541 that is acquired after the case is filed but before the case is closed, dismissed, or converted to a case under Chapter 7, 11, or 12, whichever occurs first is also part of the bankruptcy estate. The 4th Circuit concluded this meant that since the Chapter 13 bankruptcy case was not closed, dismissed, or converted, the inheritance was part of the bankruptcy estate and therefore can be used to repay the creditors.

We understand that the passing of a loved one is very traumatic and may sometimes be very unexpected. If you are filing for bankruptcy you should know if you are listed as a beneficiary in anyone’s will, trust, life insurance policy, or other instrument. The inheritance you may potentially receive may be in jeopardy depending on your circumstances.