By Keri P. Ebeck –
Despite a pandemic, the real estate market in the United States has grown and expanded. Home prices were at all-time high, while interest rates were at an all-time low. This caused a supply and demand issue, creating a buyers-market which still exists currently.
In our firm’s practicing state of Pennsylvania, Pittsburgh Home values increased by over 14.5% in 2021 and have increased by more than 63% over the last five years, Many Pittsburghers are taking advantage of this booming real estate market just as most homeowners across the country. Not only are they selling their homes for above and beyond what they paid originally, but also over their asking price.
Some of these homebuyers are currently in an active Chapter 13 bankruptcy. What happens when a Chapter 13 debtor with a confirmed plan sells their house? If there is a surplus of sale proceeds, who gets to keep the money? Should the debtor get to keep the proceeds, or should they be required to provide them to the Chapter 13 Trustee as an asset of the estate?
Bankruptcy Code, Section 1306 is applicable specifically. 11 U.S.C. §1306 provides that “Property of the estate includes, in addition to the property specified in section 541 of this title- (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.” Section 1306(b) also provides “except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.” Reviewing the Bankruptcy Code for further clarification, Section 1327(b) also applies. It states, “except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all property of the estate in the debtor.” Reading these Bankruptcy Code sections in conjunction, it begs the question: Are sale proceeds considered property of the estate after the entry of the order confirming the chapter 13 plan? The Code seems to lead toward the sale proceeds being property of the debtor, not the estate after confirmation; but what does the confirmation order say? What if the confirmation order is silent? If the real estate was clearly property of the estate at the beginning of the case, does selling it after confirmation create a different interest?
Legal analysts across the United States in many courts have reviewed this exact question. There are competing theories regarding how the Code and law should be interpreted. First is the “estate termination” theory, which views all property that vested in the debtor at confirmation, post confirmation property, and/or assets acquired, are no longer property of the estate. Second is “estate transformation”, which concludes that all property of the estate becomes property of the debtor upon confirmation except property that is essential to the debtor’s execution and performance under the confirmed plan. Third is the “estate preservation” theory, which views post-confirmation property as an asset of the estate, and it remains vested with the estate. Finally, there is “estate replenishment”. Under this theory, any asset or property that is needed post-confirmation to fulfill the plan would “replenish” the plan and pay the creditors as intended.
Cases in both Colorado and New Jersey opined on the matter and held differently. In the In Re Baker  case, Judge Brown held that under the “estate termination” theory, sale proceeds were not property of the estate. In the case of In Re Barrera , the Debtor sold their property post-confirmation and realized $140,521.00. The trustee filed a motion to compel the debtors to turn over the funds as property of the estate, the trustee’s motion was subsequently denied by the Bankruptcy Court in Colorado and was then appealed. The 10th Circuit Bankruptcy Appellate Panel (BAP) affirmed the lower court’s order. The 10th Circuit Court of Appeals affirmed both lower court’s decisions. The In Re Larzelere  case used the “estate replenishment” theory. While the Courts in Pennsylvania have not opined on the issue, under the current real estate market it may become ripe for determination sooner than later. Within the Western District Bankruptcy Court of Pennsylvania, the confirmed plan specifically states that property shall not re-vest in the debtor until the debtor has completed all payments under the confirmed plan. There is specific section within the form plan (part 7) that provides for “vesting of property of the estate”.
It is important as either a creditors’ lawyer or debtor’s lawyer to review the vesting of post-confirmation property provisions and law when seeking to sell the real estate of a chapter 13 debtor with a confirmed plan. Whether it’s $10,000 in proceeds or $150,000 in proceeds, knowing if those whether or not the proceeds would go to the debtors, could impact the decision to sell the property.
There are no one-size-fits-all solutions in bankruptcy & restructuring. Bernstein-Burkley’s nationally recognized attorneys provide pragmatic, innovative and well-tailored solutions for situations involving financially troubled companies. Please contact us for more information.
 www.learn.roofstock.com/blog/pittsburgh-real-estate-market (Feb. 23, 2022)
 In Re Baker, 620 B.R. 655 (Bankr. D. Colo. 2020)
 In Re Barrera, BAP No. 20-003-CO (2022)
 In Re Larzelere, 2021 WL 3745428 (Bankr.NJ. 2021)