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Dealing with funds returned by creditors in Chapter 13 bankruptcy

On Behalf of | Aug 9, 2016 | Chapter 13 Bankruptcy, Firm News

Florida residents with regular incomes and struggling with their finances have options. Filing for Chapter 13 bankruptcy could alleviate their financial woes while allowing them to retain their property. As part of the proceedings, the filer is required to propose a debt repayment plan for approval by the court.

Two Chapter 13 cases being administered by the same trustee recently ended. One filer received a discharge after completing a repayment plan, and the other filer’s case was dismissed because the filer failed to make the agreed upon payments. In both cases, a creditor received payments successfully but returned them to the trustee. The trustee argued that these funds were considered to be unclaimed.

A judge from the federal Bankruptcy Court for the Middle District of Alabama disagreed. In his ruling, the judge determined that since the distributions were delivered, but returned, they were not unclaimed. Therefore, in the case of the debtor who received a discharge, the excess funds were to be paid to unsecured creditors in accordance with the plan. If any funds remained thereafter, they could be returned to the filer. As for the case that was dismissed, the funds were to be returned to the filer.

Any leftover funds that are not considered to be “unclaimed” in a Chapter 13 bankruptcy fall under Section 349(b)(3) of the U.S. Bankruptcy Code. Florida filers need to remain aware of this fact as they reach the end of their repayment plan or if their cases are dismissed. Of course, the goal is to not have any funds left unused at that time, and in most cases, the filer’s attorney will focus on ensuring that happens.

Source: Bloomberg BNA, “When Money Comes Back: Court Gives Guidance on Returned Funds”, Diane Davis, Aug. 4, 2016

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