How trustees handle payments that are returned by creditors

When Texans file for Chapter 13 bankruptcy, they will enter into repayment plans that will last from between 3 and 5 years. If a person does not successfully complete the repayment plan, the bankruptcy court may either convert the bankruptcy to a Chapter 7 case or dismiss it completely. A person who does complete the plan will receive a discharge of any leftover unsecured debts at the plan’s conclusion.

In some cases, trustees will disburse payments to creditors who then return the payments to the trustee. Two cases provide some insight into what will happen to the funds when that happens.

In one case, a man successfully completed his repayment plan after proposing a payment schedule that the court accepted. One of the debts the man made payments on was a priority unsecured tax debt he owed to the IRS. After he completed his repayment plan and was granted a discharge of the remaining debts, the IRS sent $1,565 back to the trustee. In the second case, a woman who filed for Chapter 13 bankruptcy did not complete her repayment plan successfully, and the court dismissed her case. One unsecured creditor then sent back $1,673 to the trustee after the dismissal. The court determined that when a discharge happens, funds that are returned must be disbursed to the other unsecured creditors before leftover money is returned to the debtor. If the case is dismissed, the entire amount must be given back to the debtor.

Chapter 13 bankruptcy may provide people with debt relief by allowing them more time to pay back their debts. Often, people will be required to pay only a portion of their unsecured debts that are not priority ones. Those remaining balances are then discharged if the plan is successfully completed.