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Judge: debtor's car crash settlement must go to Chapter 13 estate

For Massachusetts residents who earn a regular income but are overwhelmed by debt, a Chapter 13 bankruptcy can provide significant relief. In a Chapter 13 bankruptcy the debtor enters into a court-approved plan to pay off some or all of their debt in three to five years.

The payment plan is based on the debtor's income and financial situation at the time the plan is approved. But what if the debtor receives a windfall after the plan is approved but before the payment plan is completed? Does the debtor get to keep the money, or does it have to go into the bankruptcy estate for distribution to creditors? In a recent case, a bankruptcy judge ruled in favor of the creditors in this situation.

The debtor in this case was injured in a car accident three years after his Chapter 13 repayment plan was approved by the court. As required by law, he amended the schedules to include the potential payment from his injury claim. He ultimately obtained a net settlement of almost $75,000.

The bankruptcy judge ruled that the debtor would have to put a portion of the settlement towards the remaining balance on his Chapter 13 repayment plan and also increase the amounts paid to unsecured creditors. The judge noted that the debtor may have been able to keep all of the settlement proceeds if he had submitted evidence that he needed the funds for medical and other expenses.

A debtor who comes into a significant amount of money after filing for Chapter 13 may have a duty to amend their schedules to notify the trustee and the creditors of the change in circumstances. An experienced bankruptcy attorney can advise a client whether it is necessary to do so in a given situation.

Source: BNA.com, "Auto Accident Settlement Funds Belong to Bankruptcy Estate," Diane Davis, Aug. 11, 2016

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