Chapter 13 Funds Held by Trustee Had to be Returned to Debtor, Notwithstanding Child Support Enforcement’s Demand for the Funds

Chapter 13 Funds Held by Trustee Had to be Returned to Debtor, Notwithstanding Child Support Enforcement’s Demand for the Funds

The debtor in this case voluntarily entered Chapter 13 bankruptcy. Chapter 13 bankruptcy, unlike Chapter 7 bankruptcy, allows an individual to keep his property by agreeing to repay his debts out of his future earnings. As part of that process, the Debtor sent a portion of his income to the bankruptcy trustee. But he was unable to develop a satisfactory bankruptcy plan, and so the trustee prepared to return these payments to the Debtor. At this point, the Division of Child Support Enforcement (“the Division”) ordered the trustee to instead give the Division this prepaid income because the Debtor had fallen behind on his child support payments. The trustee, unsure of what to do, asked the Bankruptcy Court to clarify his obligations. The Bankruptcy Court ruled that he should return the money to the debtor. The Division appealed, arguing that 11 U.S.C. § 1326(a)(2), which states that these payments should be returned “to the debtor,” does not require the trustee to return the income to the Debtor. This appeal concerns the meaning of that statute.

The question presented in this case is whether 11 U.S.C. § 1326(a)(2) requires a Chapter 13 bankruptcy trustee to return funds to a debtor after dismissal of the debtor’s bankruptcy case if a creditor has attempted to levy on the trustee after dismissal of the case. Perhaps because “many debtors [] fail to complete a Chapter 13 [bankruptcy] plan successfully,” Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015), this question appears to come up with some frequency. And courts have split, in roughly equal proportion, on the answer. See In re Price, 484 B.R. 870, 872 (Bankr. E.D. Ark. 2013) (“Courts are divided on the effect of a garnishment issued pursuant to state law and served on the Chapter 13 Trustee after a Chapter 13 case has been dismissed but before the Trustee has returned funds on hand to the debtor pursuant to 11 U.S.C. § 1326(a)(2).”); In re Bailey, 330 B.R. 775, 776 (Bankr. D. Or. 2005) (“There appears to be a split of authority on this issue.”).1 The Fourth Circuit has yet to speak to this issue. This Court reviews the Bankruptcy Court’s “conclusions of law de novo.” In re Meredith, 527 F.3d 372, 375 (4th Cir. 2008).

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