In a chapter 13 case, what constitutes property of the estate can be a trickier question than it initially appears. This is particularly true in the case of an inheritance. Although it is clear that if a chapter 13 debtor receives an inheritance within 180 days of the petition date the entire inheritance would be property of the estate; it is significantly less clear what the status of an inheritance received more than 180 days after the petition date. An additional layer of complexity arises when the inheritance is received after confirmation of a plan but before the debtor receives a discharge. Bankruptcy courts are divided as to whether a bankruptcy estate includes an inheritance received after the 180-day period, and no circuit courts of appeals have yet addressed the issue. This article will explore the statutory provisions that govern the issue, current case law, and what impact this issue may have on the concept of property of the estate in a chapter 13 case in general.
The definition of “property of the estate” in a chapter 13 case is found in § 1306 of the Bankruptcy Code, which provides, in part
(a) Property of the estate includes, in addition to the property specified in section 541 of this title—
(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.
The “property specified in section 541” includes any interest in a “bequest, devise or inheritance” that the debtor “acquires or becomes entitled to acquire within 180 days” of the petition date. The question then becomes, how does one reconcile the conflicting time restrictions of §§ 1306 and 541(5)(a)? Is an inheritance property of the estate only if the debtor acquires or becomes entitled to acquire it within 180 days of the petition date, as in a chapter 7 proceeding? Or is the 180-day limitation implicitly overridden in a chapter 13 case by § 1306? Courts are understandably split on this issue.
Majority Approach: Inheritances Received at Any Time Prior to Discharge Are Property of the Estate
The majority of courts that have addressed this issue have held that in a chapter 13 case, an inheritance received more than 180 days after the petition date is property of the estate. The reasoning of those cases, however, tends to be perfunctory and fails to reconcile certain important points made by the minority of courts that have held that such inheritances are not property of the estate.
The first case to address the issue was In re Euerle. In that case, without any analysis or explanation, the court held that an inheritance received by a chapter 13 debtor more than 180 days after the petition date “clearly became ‘property of the estate’ under the provisions of §§ 541(a)(5) and 1306(a)(1) of the Bankruptcy Code.”
Although the analysis of the cases that adhere to the Euerle holding tend to be quite brief, the linchpin of the analysis appears to be that the temporal expansion of § 1306 to include all property obtained by the chapter 13 debtor “before the case is closed, dismissed or converted” trumps the temporal limitation of § 541(a)(5), which limits inheritances to those that are received within 180 days of filing. That reasoning continues to be persuasive to many courts.
The problem with the majority’s reasoning has been aptly pointed out by the growing minority of courts that have held that an inheritance received by a chapter 13 debtor after the 180-day period is not property of the estate. The issue, as the minority has explained, is that the majority’s position fails to account for the fact that in contexts other than inheritances, courts have consistently held that § 1306 incorporates both the inclusive and exclusive provisions of § 541. Simply put, if § 1306 incorporates the inclusive provision of § 541(a)(5)(A) that an inheritance received after the petition date is property of the estate, it must also incorporate the limitation that § 541(a)(5)(A) applies only those inheritances received within 180 days of the petition date. To incorporate one part of § 541(a)(5)(A) and not the other has no methodological underpinnings and is inconsistent with cases dealing with other provisions of § 541.
Minority Approach: Inheritances Received More than 180 Days after the Petition Date Are Not Property of the Estate
The cases that exemplify the minority position rely on the following reasons in concluding that § 1306 does not dictate that an inheritance received by a chapter 13 debtor more than 180 days after the petition date is property of the estate.
The “Plain Meaning” of § 1306(a)
Section 1306(a) provides that only property “of the kind” described in § 541 that is received after commencement of the case will become “property of the estate.” An inheritance received more than 180 days after the commencement of a case is not “of the kind” described in § 541 because that section simply does not include such property. In fact, the plain meaning of § 541 excludes from property of the estate an inheritance received more than 180 days after commencement of a case. Thus, by the plain meaning of the statute, the inheritance at issue in this case is not “of the kind” described in § 541 and thereby is not property of the estate under § 1306(a).
The “Whole Statute” Rule of Interpretation
Whenever possible, a statutory interpretation should give effect to every word of the statute. “[I]f it can be prevented, no clause, sentence or word shall be superfluous, void, or insignificant.” Interpreting § 1306(a) to include in property of the estate an inheritance received more than 180 days after the commencement of a case makes the specific limitations set out in § 541(a)(5) superfluous. Such an interpretation essentially deletes the phrase “acquire[d] within 180 days after such date” from the statute. Importantly, interpreting § 1306 to not include an inheritance received more than 180 days after commencement of the case does not do damage to the meaning of that statute as it would not void any provision. Section 1306 would still be effective to capture all post-petition property that meets the requirements of both §§ 541 and 1306.
The Specific Controls the General Rule of Interpretation
General provisions should not supersede specific, substantive provisions. Section 541(a)(5) provides a specific time limitation of 180 days on an inheritance that will be treated as property of the estate. Section 1306(a), however, is a general blanket provision meant to incorporate by reference the specific list of § 541 property. Considering that structure, and in the face of any potential ambiguity in the wording of the two provisions, the substantive limitation of § 541(a)(5) requiring the inheritance to have been received within 180 days should carry more weight as to the intended meaning of the statutes.
The Implications of § 1306(a)(2) on the Meaning of § 1306(a)(1)
Section 1306(a)(2) states that in a chapter 13 case, property of the estate includes “earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted.” That provision addresses and counters the specific statutory exclusion of such post-petition wages that is found in § 541(a)(6). Indeed, while § 541(a)(6) specifically excludes from property of the estate “earnings from services performed by an individual debtor after the commencement of the case,” § 1306(a)(2) counters that “earnings from services performed by the debtor after the commencement of the case” do become property of the estate.
As explained by the court in Key, several important conclusions can be drawn from this direct and specific method, which is used by Congress to draw post-petition wages into property of the estate in a chapter 13 case. First, Congress knew how to directly nullify certain exclusions in § 541 and evidenced its ability to do so in subsection (a)(2). Thus, it is significant that Congress chose not to include a similarly direct nullification of the 180-day limitation in § 1306(a)(1). The U.S. Supreme Court has explained that “where Congress includes particular language in one section of a statute but omits it in another[,] … it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”
The second important conclusion is that if § 1306(a)(1) was intended to be broad enough to vitiate all time limitations provided in § 541, there would be no reason to also enact subsection (a)(2) at all. If the wording in § 1306(a)(1) incorporates property “of the kind” stated in § 541 without regard to the specific time limitations set out in § 541, § 1306(a)(2) would have been unnecessary. By including subsection (a)(2), Congress evidenced its intent to incorporate § 541 as a whole, embracing both its inclusions and exclusions.Notably, none of the reported decisions adopting the majority approach address this issue. Simply put, if § 1306(a)(1) incorporates all property of the estate of a kind set forth in § 541, why did Congress need to include § 1306(a)(2) to specifically reincorporate post-petition earnings?
The Impact of § 1327 on Inheritances Received Post-Confirmation
An additional issue arises when a debtor acquires or becomes entitled to acquire an inheritance after the plan is confirmed. Under § 1327(b) and (c) of the Bankruptcy Code, “[e]xcept as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor” and “the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan.” So, the following question arises: If a debtor acquires or becomes entitled to acquire an inheritance post-confirmation, is it property of the estate under § 1306(a), notwithstanding the vesting provision of § 1327? Answering that question may turn on a court’s interpretation of § 1327. Consequently, there are four schools of thought regarding the impact of § 1327 on property of the estate.
The first is the “estate preservation approach,” which provides that property “vesting” in the debtor does not vitiate the bankruptcy estate, and therefore, all pre-confirmation property, although “vested” in the debtor, remains property of the estate throughout the life of the chapter 13 plan. The second approach, called the “modified estate preservation approach,” provides that property of the estate existing at the time of confirmation vests in the debtor, while post-confirmation property becomes new property of the estate.
The third approach — the “estate transformation approach” — provides that post-confirmation, all property currently held and acquired in the future is not property of the estate unless it is necessary to fulfill the provisions of the plan. The final approach is the “estate-termination approach,” which holds that upon confirmation, all property vests in the debtor and the estate is terminated.
Depending on which of the above-listed approaches a court follows regarding the existence of post-confirmation property of the estate, that approach should impact whether that court determines that an inheritance received post-confirmation is property of the estate because those two issues are inextricably linked. If a court follows the first or second approach, the majority’s holding on the inheritance issue is more consistent with those approaches. However, if the court follows either the estate-transformation approach or the estate-termination approach, the minority’s interpretation of the inheritance issue would seem to be much more appropriate.
Due to the length of a chapter 13 case, changes in a debtor’s financial situation are typical. The Bankruptcy Code’s provisions for dealing with the effect of property obtained post-petition and post-confirmation are the subject of considerable dispute. Practitioners and parties crave consistent rules regarding the definition of property of the estate so that both creditors and debtors can have some certainty as to what must be committed to a chapter 13 plan. As to inheritances received more than 180 days after the filing date, the cases holding that those inheritances are not property of the estate appear to have more in-depth, if not better, legal analysis. Until a firm rule is established, however, it is important for every consumer practitioner to advise his or her clients that any inheritance received during the entire plan term needs to be disclosed, and that depending on the court’s view, it may be considered property of the estate, which in turn may require an increased payout to unsecured creditors under the debtor’s plan.
1. One case that will address the issue, In re Carroll, has been certified for direct review to the Fourth Circuit Court of Appeals. No. 09-01177-8-JRL, 2012 WL 5960077, *3 (Bankr. E.D.N.C. Nov. 28, 2012).
2. 11 U.S.C. § 541(5)(a).
3. 70 B.R. 72 (Bankr. D.N.H. 1987).
4. Id. at 73.
5. See, e.g., In re Brinkley, 323 B.R. 685, 689 (Bankr. W.D. Ark. 2005) (holding that “[s]ection 1306 … expands the 180-day inclusionary period in a chapter 13 case”); In re Guentert, 206 B.R. 958, 962 (Bankr. W.D. Miss. 1997) (concluding that § 1306 expands the temporal limitations of § 541).
6. In re Mullican, 417 B.R. 389, 399 (Bankr. E.D. Tex. 2008) (making conclusory statement that § 1306(a)(1) expands definition of property of estate to include inheritance received more than 180 days after filing); In re Tinney, No. 07-42020-JRR13, 2012 WL 2742457, at *2 (Bankr. N.D. Ala. July 9, 2012); In re Watson, No. 08-82602-JAC-13, 2012 WL 2120530, at *3 (Bankr. N.D. Ala. June 11, 2012); In re Carroll, No. 09-0117-8-JRL, 2012 WL 5512356, at *1 (Bankr. E.D.N.C. Nov. 14, 2012); In re Zeitchik, No. 09-05821-8-JRL, 2011 WL 5909279, at *1 (Bankr. E.D.N.C. Sept. 23, 2011). The majority view has also been adopted by one prominent treatise: Keith Lundin, Chapter 13 Bankruptcy, § 47-2 (3d ed. 2000 & Supp. 2004).
7. In re Schlottman, 319 B.R. 23, 25 (Bankr. M.D. Fla. 2004); In re Key, 465 B.R. 709, 711-12 (Bankr. S.D. Ga. 2012); In re Walsh, No. 07-60744, 2011 WL 2621018, at *3 (Bankr. S.D. Ga. June 15, 2011).
8. See In re Egan, 458 B.R. 836, 845-46 (Bankr. E.D. Pa. 2011) (dealing with 401(k) contributions, held that § 1306 incorporates by reference its inclusions, as well as exclusions).
9. Schlottman, 319 B.R. at 25. But see Tinney, 2012 WL 2742457, at *2 (“The kind of property is a distinct concept from the time at which the debtor’s interest in the property was acquired.”).
10. TRW Inc. v. Andrews, 534 U.S. 19, 31, 122 S. Ct. 441 (2001).
11. Walsh, 2011 WL 2621018, at *2.
12. Morales v. Trans World Airlines Inc., 504 U.S. 374, 385, 112 S. Ct. 2031 (1992).
13. Walsh, 2011 WL 2621018, at *2.
14. In re Key, 465 B.R. 709, 712 (Bankr. S.D. Ga. 2012).
15. Keene Corp. v. United States, 508 U.S. 200, 208, 113 S. Ct. 2035 (1993) (quoting Russello v. United States, 464 U.S. 16, 23, 104 S. Ct. 296 (1983)).
16. Key, 465 B.R. at 712.
17. See Security Bank of Marshalltown, Iowa v. Neiman, 1 F.3d 687, 690 (8th Cir. 1993).
18. Barbosa v. Solomon, 235 F.3d 31, 37 (1st Cir. 2000).
19. In re Heath, 115 F.3d 521, 24 (7th Cir. 1997).
20. In re Jones, 420 B.R. 506, 515 (B.A.P. 9th Cir. 2009).
21. See In re Mullican, 417 B.R. 389, 399 (Bankr. E.D. Tex. 2008).