A Chapter 13 client contacted me this morning with a somewhat unusual situation. She called because she has been in her Chapter 13 case for almost exactly three years and she wanted to pay off her case and get out of bankruptcy.
I looked at the claims file and at her account on the trustee’ s web site and calculated that she would need between $5,000 and $10,000 as of her three year anniversary to pay off her case (the usability of the trustee’s web site merits a post of its own, but my best guess in this case was between $5k and $10k).
I asked where the money would come from and she advised me that her mortgage company would lend it to her based on a fairly significant increase in the value of her property during the three years since she had filed. I should also point out that at the time we filed, there did not appear to be any equity at all and our confirmed Chapter 13 plan called for a 2 pennies on the dollar divided to unsecured creditors.
The question I had – if I contacted the trustee for a payoff at 36 months, how would the trustee treat the increased value in the property? Would the trustee simply accept the cash and issue a discharge that paid unsecured creditors 2%? Or would the trustee take the position that the increased equity belongs to the estate and ask that some or all of the cash proceeds from a refinance be paid to the trustee?
For my analysis, click
I posed this question to one of the Chapter 13 trustee’s in Atlanta, and his response was that the trustee would take an interest in the increased equity. He cited as authority the case of Barbosa v. Solomon from the 1st Circuit. In Barbosa, the 1st Circuit Court of Appeals held that the increased value of the estate constituted property of the estate and that the trustee had an interest in the appreciated property. In Barbosa, the property had been sold so the Court was talking about ownership of cash – in my case, the property has not been sold – I presume that the increased value would be reflected in an increased dividend to unsecured creditors.
Of course, the Bankruptcy Court for the Northern District of Georgia is not in the 1st Circuit, so it is possible that the judge assigned to my client’s case would rule differently, but I doubt that. If my client wants to pay off her case ,she will not get the benefit of the increased equity, if this increased value actually exists – that value will accrue to the trustee.