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Pay Me, Maybe? Creditors’ Superior Claim to Undistributed Funds After a Conversion from Chapter 13 to Chapter 7

By: Rosa Aliberti

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, the Fifth Circuit held, in Viegelahn v. Harris (In re Harris),[i] that any funds held by a chapter 13 trustee at the time of conversion to chapter 7 should be distributed to creditors in accordance with the chapter 13 payment plan.[ii] In In re Harris, the debtor filed for bankruptcy under chapter 13 of the Bankruptcy Code.[iii] The chapter 13 plan required the debtor to make monthly payments to a trustee for distribution to secured creditors and unsecured creditors.[iv] The debtor also was required to make monthly mortgage payments directly to Chase, his mortgage lender. After failing to do so, the bank foreclosed on his home.[v] The debtor did not modify the plan and continued making the required monthly payments to the trustee for approximately a year before converting his case to chapter 7.[vi] Since Chase no longer had a claim against the debtor, the funds that were allocated for Chase under the plan began to accumulate.[vii] After the debtor converted to chapter 7, the chapter 13 trustee distributed the funds in her possession to pay the debtor’s attorneys’ fees, the remaining secured creditor, the six unsecured creditors, and her commission.[viii] The debtor moved to compel the chapter 13 trustee to return those funds, arguing that the trustee was not authorized to distribute the funds once he converted the case to chapter 7.[ix] The bankruptcy court ordered the chapter 13 trustee to return the funds to the debtor,[x] and on appeal, the district court affirmed.[xi] The trustee appealed again, and the Fifth Circuit reversed,[xii] concluding that the creditors’ claim to the undistributed funds was greater than that of the debtor.[xiii]

Time-Barred Proof of Claims Violate FDCPA

By: Garam Choe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in Crawford v. LVNV Funding, LLC, the Eleventh Circuit held that the creditor violated the Fair Debt Collection Practices Act (“FDCPA”) by filing a proof of claim to collect a debt that was unenforceable because the statute of limitations had expired.[i] In Crawford, a third-party creditor acquired a debt owed by the debtor from a furniture company.[ii] The last transaction on the account occurred in October 2001.[iii] Accordingly, under Alabama’s three-year statute of limitations, the debt became unenforceable in October 2004.[iv] On February 2, 2008, the debtor filed bankruptcy under chapter 13 of the Bankruptcy Code.[v] The third-party creditor then filed a proof of claim for the time-barred debt during the debtor’s bankruptcy proceeding.[vi] Neither the debtor nor the bankruptcy trustee objected the claim.[vii] Rather, the trustee distributed the pro rata portion of the claim from the plan payments to the creditor.[viii] In May 2012, the debtor commenced an adversary proceeding against the third-party creditor alleging that the third-party creditor filed a proof of claim for a time-barred debt in violation of the FDCPA.[ix] The bankruptcy court dismissed the adversary proceeding in its entirety, and district court affirmed.[x] In affirming the bankruptcy court’s dismissal, the district court found that the third-party creditor did not attempt to collect a debt from the debtor because filing a proof of claim is “merely ‘a request to participate in the distribution of the bankruptcy estate under court control.’”[xi] Furthermore, the district court found that, even if the third-party creditor was attempting to collect the debt, the third-party creditor did not engage in abusive practices.[xii] On appeal, the Eleventh Circuit reversed, holding that the third-party creditor violated the FDCPA by filing a stale claim in the bankruptcy court.[xiii]

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