Supreme Court rules for debtor in bankruptcy case

Minnesota residents considering a bankruptcy filing may be interested in a May 18 decision by the U.S. Supreme Court regarding how funds are distributed when a Chapter 13 bankruptcy is converted to a Chapter 7 bankruptcy. The case in question concerns a Texas man who sought the return of funds that had been garnished from his paycheck but not yet distributed by the Chapter 13 trustee. The unanimous Supreme Court decision overturned a ruling by an appeals court and ordered that the money be returned to the man.

The issue has been hotly contested in bankruptcy courts for several decades, but the Supreme Court decision was based on a 1994 revision of bankruptcy laws. The 1994 law stated that Chapter 13 post-petition earnings only become part of the Chapter 7 estate in cases of bad faith. The justices said that they found no evidence indicating that the man concerned had acted in bad faith, and they pointed out that keeping and distributing garnished wages contradicted the provisions of the 1994 law.

The trustee in the case had argued that she was required by law to distribute the funds or wind up the Chapter 13 estate, but the justices said that she was only required to turn over records to the Chapter 7 trustee and file a report. The Supreme Court also dismissed a claim that keeping money that he would have kept had he filed a Chapter 7 bankruptcy to begin with amounted to a windfall for the man.

Individuals struggling to cope with an unmanageable financial situation are often unclear about the differences between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy. An attorney with experience in this area could explain how the two forms of debt relief differ as well as the eligibility requirements for each.

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