CHAPTER 5, C. The State of the Chapter 13 Estate: Miseducation of §§ 1306 and 1327

• Jurisdiction: United States

C. The State of the Chapter 13 Estate: Miseducation of §§ 1306 and 1327

ABI Journal

October 2019

Charissa Potts

Freedom Law, PC

Eastpointe, Mich.

The inquiry into the proper composition of a chapter 13 estate property is vexing, as the Bankruptcy Code appears to provide contradictory instruction. The attempts to harmonize the contradictions fail by selectively weighting one Code provision over another, or by creating theory unsupported by textual analysis. Further, the lifespan of a chapter 13 case provides ample opportunity for these views to play out in ways that are illogical, or worse, logical but absurd.

Section 541 is the starting point for determining estate property for all chapters: Pre-petition property is part of the debtor's estate, while post-petition property is not. A relevant exception is found in § 541(a)(5), which brings into the estate inheritances, life insurance payouts and divorce property settlements obtained within 180 days after the petition filing date. Section 1306 expands the composition of the chapter 13 estate to include any post-petition property obtained by the debtor:

Property of the estate includes, in addition to the property specified in section 541 ... —

(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; and
(2) earnings from services performed by the debtor 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.¹

The chapter 13 estate is subject to an additional provision in § 1327, effective upon a chapter 13 plan's confirmation:

(b) 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.
(c) Except as otherwise provided in the plan or in the order confirming the plan, 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.²

Courts have read the provisions of §§ 1306 and 1327 as being contradictory. The author's position is that they are not contradictory when the language of these provisions is logically dissected.

Conflicting Theories and the Impact of § 1322(b)(9)

A survey of various courts' approaches to resolving the tension between §§ 1306 and 1327 indicates that there are nearly as many approaches to the issue as there are courts. To further complicate matters, § 1322(b)(9) allows debtors to propose a plan that nullifies § 1327(b) entirely by "provid[ing] for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity."³

Section 1322(b)(9) is a powerful but often overlooked provision that appears to give debtors complete latitude in determining how property of the estate is vested, when vesting occurs, and to whom property is vested. The flexibility allowed by chapter 13 to craft a plan specifying the nature of the chapter 13 estate arguably makes any discussion on the "correct theory" of the chapter 13 estate trivial or, at best, academic.

The patchwork of court opinions on this issue indicates that local practice and custom heavily influence the outcome of the decisions. The search for a "correct" prevailing theory that brings harmony to the contradictory Code provisions might never reach a conclusive result, but a robust discussion can develop one's practice or provide a grundnorm in the...