By Ryan C. Wood
If you filed a Chapter 13 bankruptcy case and then for whatever reason had to convert the case under Chapter 7 what happens to property of the estate that was spent, like a tax refund, once you convert to a Chapter 7 bankruptcy? This issue was addressed by the Bankruptcy Appellate Panel for the Ninth Circuit in Warfield v. Salazar (In re Salazar), 465 B.R. 875 (9th Cir. BAP March, 2012).
Section 348 Effect of Conversion provides (f)(1) Except as provided in paragraph (2), when a case under chapter 13 of this title is converted to a case under another chapter under this title— (A) property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.
In this case the debtor filed a Chapter 13 case and the plan of reorganization was not confirmed at the time the debtor converted the case to Chapter 7. Upon conversion the Chapter 7 Trustee assigned to the case filed a motion to compel the debtor to turn over their tax refund they received. The prepetition refund was not listed in their Schedule B and Schedule B was not amended to include the prepetition tax refund. The debtor spent the money on normal living expenses and gave half to his wife for living expenses.
As a San Jose bankruptcy lawyer I find it strange that in this case, and maybe I missed something when quickly reading the facts, but was the tax refund due and payable prepetition ( or pre-conversion) but received postpetition? It would make more sense for the Chapter 7 Trustee to go after the tax refund under these circumstances. If the debtor received the tax refund prepetition (before filing the initial Chapter 13 case) and spent the tax refund prepetition then the grounds to compel the payment of the tax refund really should not exist. It would be no different than funds from some other source, depositing them, then using the money to buy new tires for a car or on other living expenses that are reasonable. If you are in need of a San Jose bankruptcy attorney please give us a call toll free at 1-877-963-9543.
Also, it is unclear how the Bankruptcy Appellate Panel is using prepetition. The decision would be clearer if they used the term pre-conversion. I believe the BAP is referring to the time period between when the Chapter 13 case was filed and when the case was converted to Chapter 7. During this time the debtor received the tax refund and then spent it on reasonable living expenses. So at the time of the conversion to Chapter 7 the remaining property of the estate did not include the tax refund.
