Whether Undistributed Chapter 13 Payment Plan Funds Held By a Chapter 13 Trustee Should Be Distributed to the Debtor or the Debtor’s Creditors After Conversion from Chapter 13 to Chapter 7

(Excerpt) Qualified individuals seeking to reorganize their debts may file under Chapter 13 of the Bankruptcy Code. Under chapter 13, a debtor makes payments according to a court approved payment plan, which is administered by a chapter 13 trustee, and remains in possession of all the property of the estate. Once a debtor makes all his payments under the chapter 13 payment plan, he has a right to seek a discharge, provided that he meets certain requirements. These requirements include that the debtor: (1) certifying that he paid all domestic support obligations prior to the certification being made; (2) received no discharge in any case previously filed within a statutorily prescribed amount of time; and (3) completed a course in financial management. Despite the advantages of filing under chapter 13, these plans often fail when debtors can no longer make payments under the chapter 13 plan. In these situations, debtors may ask the court to dismiss their case, or they may convert their case from chapter 13 to chapter 7. A dismissal of a chapter 13 case essentially voids the bankruptcy filing, and therefore, creditors may proceed with any collection activities against the debtors. Upon conversion to a chapter 7 case, however, a chapter 7 trustee is assigned to administer the chapter 7 case and liquidate a debtor’s nonexempt assets to pay the creditors. At the same time, the chapter 13 trustee winds up. Notably, undistributed post-petition funds paid by the debtor to the chapter 13 trustee are not included in the chapter 7 estate, but the Bankruptcy Code does not expressly state, and courts have not agreed on, how those funds should be treated