by Equity created by payments into a chapter 13 plan belongs to the debtor upon conversion to chapter 7. In re Hodges, No. 13-361 (E.D. Tenn. Sept. 29, 2014). Hodges involved a tug-of-war between the debtor and the trustee over equity in the debtor’s residence that was created by the debtor’s payments into his chapter 13 plan prior to conversion. The district court affirmed the bankruptcy court’s order that the equity belonged to the debtor and that the trustee must abandon the property.
Section 348(f)(1)(A) provides that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition.” The court found that section 348(f)(1)(A) was designed to encourage debtors to attempt chapter 13 debt repayment rather than chapter 7 liquidation, by removing a potential penalty in the event of failure and subsequent conversion. Citing a series of cases including In re Michael, 699 F.3d 305 (3d Cir. 2012), the court found that the plain language of the statute is clear that post-petition equity is not part of the estate of the converted case because it was not part of the property of the original chapter 13 estate.
In so holding, the court rejected the trustee’s arguments based on section 541(a)(7) and 1306(a) that estate property includes certain post-petition acquisitions. Both of those sections deal with ongoing chapter 13 cases rather than converted cases. The court also rejected the trustee’s suggestion that relevant property is the asset itself, which was part of the original chapter 13 estate, rather than the equity built up during the existence of the plan. The trustee offered no support for this proposition and the court found it to be contrary to the weight of authority interpreting section 348(f). Rather, the court held that “[w]hile it could be said that under § 348 the equity must be ‘newly acquired’ during the Chapter 13 bankruptcy, the underlying asset need not be.”
Turning to the issue of abandonment, the district court found that the bankruptcy court correctly calculated the potential benefit to the chapter 7 estate given the encumbrances on the property, the debtor’s homestead exemption, and the trustee’s commission. “As the bankruptcy court explained, the estate would only net $5,293.34, which is not even sufficient to pay the commission and attorney fees, never mind pay any unsecured creditor.” For that reason, the court found no error in compelling abandonment of the property pursuant to section 554(b) “on the ground that it was of inconsequential value and benefit to the estate.”