The Chapter 13 Estate and its Discontents

Abstract

Thirty years after the enactment of the Bankruptcy Code, the courts have yet to agree on a theory of the bankruptcy estate in Chapter 13 cases. This is not the fault of the courts. The Bankruptcy Code is contradictory as to the composition of the chapter 13 estate. This article selects one of four possible theories and defends it as the one that does the least violence to the plain meaning of the Bankruptcy Code.

This theory is referred to in this article as the "Divestment Theory," because it holds that, upon confirmation of a chapter 13 plan, the debtor becomes the absolute owner of the bankruptcy estate. "Divestment" -- a statutory term -- is interpreted to mean absolute alienation of the bankruptcy estate to the debtor. Under this theory, the automatic stay comes to an end with regard to this property (though it continues to restrain prepetition creditors for the life of the plan). The debtor need not seek court permission to encumber or sell these assets, as the property is no longer "property of the estate." A debtor, however, must pay postconfirmation wages to the chapter 13 trustee. These funds are held for the benefit of creditors and so become the only postconfirmation bankruptcy estate.

The proper theory of the chapter 13 estate much affects the interpretation of the converted chapter 7 liquidation cases, and the article contains a complete theory of those cases.

Keywords: Debtor, Credit, Prepetition, Estate Transformation, Bankruptcy Estate, Bankruptcy Trustee, Vesting