Arthur B. Federman, U.S. Bankruptcy Judge.
Chapter 13 Debtors Keith and Michele Portell filed a Motion to spend an inheritance which Keith Portell received postpetition. The Debtors are proposing to use a portion of the inheritance pay off all the debts on which Keith Portell is obligated, including the Debtors' residential mortgage, and keep the rest of the funds; they do not plan to use the funds to pay the debts on which Michele Portell is individually obligated. The Chapter 13 Trustee objects, asserting that all claims in the case should be paid from the inheritance. For the reasons that follow, the Trustee's Objection will be OVERRULED, and the Debtors' Motion to Spend Inheritance will be GRANTED. In addition, the Trustee's Motion to Amend Plan will be DENIED; however, the Debtors will be ordered to amend their Plan to provide that after using the inheritance to pay Keith's creditors, and the joint creditors, they will continue to make payments until Michele's creditors receive the same dividend provided in the plan previously confirmed.
The Debtors filed this Chapter 13 bankruptcy case on September 27, 2012. They are below-median. Pursuant to their confirmed plan, allowed unsecured claims are being paid a liquidation analysis pot of $23,130.07, which results in a dividend of 40.334%. According to the Trustee, the Plan is running approximately 63 approximately months.
On July 23, 2015, which was in the thirty-fourth month of the plan, a relative of Keith Portell passed away, leaving Keith an inheritance which included funds in the amount of $221,510.53. The Trustee does not dispute that the Debtors promptly reported the inheritance to him upon receipt. In this motion, the Debtors are proposing to use the inheritance funds to pay all joint and sole debt owed by Keith, including the joint obligation secured by their homestead. They are proposing not to pay the debts for which only Michele is obligated. According to the parties, this will leave approximately $12,000 of Michele's separate debts unpaid.
The Chapter 13 Trustee objects, asserting that the inheritance should go to pay all of the Debtors' debts, including Michele's separate debts. He asserts that the inheritance is: (i) property of the estate under § 1306(a)(1); (ii) income; and (iii) a postpetition change in circumstances under § 1329 of the Bankruptcy Code, requiring
In a Chapter 13 bankruptcy case such as the one here:
Section 541(a)(1) defines property of the estate exceptionally broadly, to include "all legal or equitable interests of the debtor in property as of the commencement of the case."
However, while the Bankruptcy Code determines what interests constitute property of a bankruptcy estate, state law governs what a debtor's property interests
As relevant here, § 451.250.1 of the Missouri Statutes provides:
Under this statute, the inheritance received by Keith is his own separate property which, outside of bankruptcy, cannot involuntarily be taken to pay Michele's separate debts. The question presented here is whether the filing of the joint bankruptcy case changes that premise.
Section 302 of the Bankruptcy Code authorizes the filing of a joint bankruptcy petition by an individual and the individual's spouse.
Section 302(b) provides that after the commencement of a joint case, "the court shall determine the extent, if any, to which the debtors' estates shall be consolidated."
As stated, no one has expressly asked that the Debtors' estates here be substantively consolidated under § 302(b), but, in asking that Keith's separate property be used to pay Michele's separate debts, that is, in effect, what the Trustee is seeking here.
The Trustee asserts that § 451.250 "was not intended to protect [Keith] and is not a vehicle within which the debtors can exclude a portion of the inheritance proceeds as property of the estate for his benefit." As stated above, the Trustee is correct that the inheritance is property of Keith's bankruptcy estate. But that does not answer the question of who must be paid from it. On that question, contrary to the Trustee's position, protecting Keith's inheritance from Michele's creditors is very clearly the intent of the statute.
In In re True,
The Trustee cites no case, and I found none, where a bankruptcy court held that one spouse's separate property under state law is property of the other spouse's bankruptcy estate under § 541 or, by extension, § 1306. I conclude, therefore, that pursuant to Missouri law, Keith's inheritance is his separate property and is includable in only his bankruptcy estate for the payment of only the debts for which he is liable.
In conjunction with his objection to the Debtors' motion to spend the inheritance,
I agree that the inheritance in this case is a substantial change in circumstances warranting an amended plan. The question is, however, what must an amended plan propose?
Although not raised in his Motion to Amend the Plan, the Trustee asserted in his initial objection to the Debtor's motion to spend the inheritance that the inheritance is "disposable income." Section 1325(b)(1)(B) requires that, if the trustee or holder of an allowed unsecured claim objects to the confirmation of a plan, then the court may not approve the plan unless, as of the effective date of the plan, "the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan."
Nevertheless, because the Trustee cited
In re Honey was a Chapter 12 case. The married debtors there had proposed a five-year plan, commencing on April 11, 1988. One of the debtor's father passed away in June 1992, and the estate was admitted to probate in October 1992. However, that debtor did not actually receive the inheritance until shortly after the plan concluded in April 1993. The debtors there never disclosed the expected inheritance. However, an undersecured creditor who had not been paid on its unsecured claim apparently found out about it shortly after the discharge was entered, and filed an adversary proceeding seeking to revoke the discharge and require a plan modification to commit the inheritance to unsecured creditors, or to convert the case to Chapter 7 based on the debtors' fraudulent failure to disclose the inheritance.
On the question of modification, the District Court concluded that it was without jurisdiction to require modification of a Chapter 12 plan which had already run the statutory maximum of five years.
Nevertheless, the District Court concluded that that the inheritance was disposable income under § 1225(b)(1)(B). "Disposable income" was (and still is) defined in § 1225(b)(2) as the income received by the debtor that is not reasonably necessary for the maintenance and support of the debtor's family, and the preservation and operation of the debtor's business.
At the outset, I would mention that the distinction between "property of the estate" and "disposable income" in bankruptcy parlance is not always clear, and many courts and commentators blur the distinction. Outside of bankruptcy, an inheritance might seem like "income" because the Internal Revenue Code considers it "income," albeit often non-taxable income. In the bankruptcy context, I am not convinced it fits neatly into the definition of "disposable income," particularly in a Chapter 13 case, since "disposable income" is defined more narrowly for Chapter 13
That said, § 1322(a)(1), which does apply to plan modifications, provides that a plan "shall provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan." The Trustee asserts that the inheritance is such "other future income" which must be committed to payment of creditors.
What constitutes "other future income" under § 1322(a)(1) is analyzed in the context of a proposed plan, and specifically, whether the debtors are committing enough future resources "necessary for the execution of the plan" being proposed.
As the Trustee asserts, some courts have held that postpetition inheritances are income pursuant to § 1322(a)(1) for purposes of plan modification.
I recognize that, because the Debtors are proposing to use some of the inheritance to pay off their residential mortgage, they will not have an ongoing mortgage payment, which is currently about $1000 per month. This is, indeed, a substantial change in circumstances directly affecting Michele's finances, since it arguably frees up some of her income to pay her unsecured creditors.
However, the Debtors are below-median, meaning that they are only required to remain in their bankruptcy case for 36 months (or however much longer it takes to pay off the liquidation analysis pot). The Debtors are past month 36 in their plan. Although the Debtors must commit enough of their future income to fully pay the confirmed plan's 40.334% dividend to Michele's own unsecured creditors, her change in circumstances concerning her mortgage does not require more than that dividend after 36 months.
Finally, although § 1325(b)'s disposable income test does not apply to plan modifications, § 1325(a)(3)'s good faith requirement does.
In re Gengenbach,
I agree with the Gengenbach court's conclusion that a plan modification must meet § 1325(a)(3)'s good faith requirement and, generally, that debtors who receive postpetition inheritances should not receive an unfair windfall at the expense of their creditors. However, the Gengenbach court was not dealing with a statute similar to § 451.250.1; rather, the court there appeared to presume that the inheritance belonged to both debtors. But, as courts have held in connection with exemption planning, simply doing what the law allows you to do is not, in and of itself, bad faith.
For the reasons stated, I conclude that Keith's inheritance is property of Keith's bankruptcy estate and, perhaps, disposable income attributable to Keith. Either way, however, absent bad faith, Missouri law prevents this Court from requiring Keith to use his inheritance to pay Michele's separate creditors. I find that the Debtors' proposal is made in good faith. As such, the Debtors must propose a plan which commits enough of the inheritance to pay Keith's creditors in full, but need not pay Michele's separate creditors more than the 40.334% provided in the previously confirmed plan.
ACCORDINGLY, the Debtors' Motion to Spend Inheritance is GRANTED; the Trustee's Objection to such Motion is OVERRULED. The Trustee's Motion to Amend Plan is DENIED. However, the Debtors are ORDERED to file an amended plan which pays the claim secured by their residential mortgage in full, pays Keith Portell's separate creditors in full, and pays a dividend of 40.334% to Michele Portell's separate unsecured creditors.
IT IS SO ORDERED.