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What happens to the proceeds of a settlement in Chapter 13 bankruptcy?

Chapter 13 bankruptcy can be a significant source of financial relief for struggling debtors with a regular income. As we’ve previously discussed on this blog, Chapter 13 bankruptcy works by establishing a three to five year repayment plan. One of the major benefits of this form of bankruptcy over Chapter 7 bankruptcy is that no assets are sold to make the plan work.

Chapter 13 bankruptcy does allow debtors with a regular income to receive debt relief without losing property, but debtors need to realize that their future income may be used to repay their creditors. A recent case highlighting this point was decided earlier this month in U.S. Bankruptcy Court for Western District of Louisiana. 

The case involved a debtor who was involved in a car accident three years after his Chapter 13 repayment plan was confirmed. The debtor obtained a settlement from that accident and the question arose whether, and to what extent, he was entitled to the proceeds of that settlement. The trustee proposed a modified repayment plan which took into account the settlement.  

The U.S. Bankruptcy Court decided that the settlement was part of the property of the estate, which represented a growing majority view in the federal courts regarding whether property acquired by a Chapter 13 debtor after repayment plan confirmation is property of the estate. The court ruled that priority for proceeds for such a settlement goes to creditors, with the remaining portion going to the debtor, though the court apparently would have considered evidence that the debtor needed all the proceeds for medical and living expenses.

In our next post, we’ll look a bit more at what the bankruptcy code has to say about modification of Chapter 13 repayment plans

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