3 February 2014
Answer: The whole picture changes and you have to account
for the increase in the asset’s value, among other things, so you may want to think very hard
before taking that path.
Your chapter 13 plan is moving along and your plan has been
confirmed, that means it has been accepted and the bankruptcy court has issued
an order establishing the terms of the plan.
(The most important term to debtors is usually how much they have to pay
to the trustee on a monthly basis.) Then
something changes, it could be that the debtor starts to struggle to make the
payments, or that the debtor wants to end the chapter 13 sooner than the
chapter 13 plan is expected to end by paying what they think remains under the
plan. One attractive thought is to sell
an asset, such as the debtor’s house, which has increased in value in order to
reach the goal. But this path has been
taken before by other debtors and it can be dangerous. There is much law that applies, so you must
plan in advance to see if you should pursue this.
First to understand is that in the (federal) First Circuit,
which includes Massachusetts, the increase in funds from the sale of the asset
is indeed something that the unsecured creditors in your case are entitled to. In
re Barbosa, 235 F.3d 31, 41 (1st Cir. 2000). To be more
technical, the creditors will be entitled to whatever exceeds the amount you can
exempt in the asset (to satisfy what is called the “best interests of creditors
test”). In fact, it is standard for Massachusetts
chapter 13 trustees to insert the following language into the terms of the
chapter 13 plan:
Unless otherwise ordered by the
court, all property of the estate as defined in
U.S.C. §§ 541 and 1306,
including, but not limited to, any appreciation in the value of real property
owned by the debtor as of the commencement of the case, shall remain property
of the estate during the term of the plan and shall vest in the Debtor(s) only
upon discharge.
This language is just icing on the cake for the proposition that
an appreciation in value after the petition date is to be considered when
deciding the amount of payment to be paid to the trustee in a modified chapter
13 plan. In re Kieta, 315 B.R. 192, 198
(Bankr. D. Mass. 2004).
Many times, because the new appreciated value obtained is
larger than any amount you could exempt, selling and realizing the funds will
lead to an increase in payments to the unsecured creditors through the trustee.
However, the increased payments occur only if you actually sell the asset and
realize the increase value. If you just
keep the asset and do not sell it during your plan, you are entitled to keep the
increase/appreciation in value in its original non-liquidated form. In
re Kieta, 315 B.R. 192, 197-98 (Bankr. D. Mass. 2004); In re Trumbas, 245 B.R.
764, 767 fn.6 (Bankr. D. Mass. 2000).
This is why it is very important to plan accordingly before deciding to
try to sell the asset and use the proceeds that represent the appreciation in
value during the chapter 13 case. If you
do, you must file a new, amended chapter 13 plan and other documents with the court.
If you do plan and decide that selling an asset for some
purpose during a chapter 13 plan is the right way to go, an important
housekeeping item is that you must seek and obtain court authorization prior to
any sale of the asset. Keep in mind,
during a chapter 13, almost all of the property you have and will have is
property of the chapter 13 estate and you are not permitted to sell it prior to
obtaining court approval.
In the event you are planning to file a chapter 13, feel free
to call us.
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