Court gives guidance on how trustees handle returned money

In some Chapter 13 bankruptcy cases in Michigan, creditors may return money that is paid to them to the bankruptcy trustee. A 2016 ruling in an Alabama bankruptcy court provides some guidance about how returned money might be handled.

In one of the cases, a debtor successfully completed his Chapter 13 bankruptcy repayment plan and received a discharge. One of the debts that he had repaid during his plan was a $7,333 priority unsecured claim that he owed to the IRS. After he received his discharge, the IRS sent back $1,565 to the trustee. In the other case, a woman’s Chapter 13 bankruptcy case was dismissed for not making her payments under the plan. After her case was dismissed, one of her creditors sent back $1,673 to the trustee.

The bankruptcy court held that money that is sent back to the trustee after a discharge should be distributed to the debtor’s creditors, and if they are paid off with it, then any remainder should be then sent to the debtor. When a creditor returns money to the trustee after a dismissal, however, the court ruled that the money the trustee receives should be sent in full to the debtor.

Bankruptcy may offer the chance to eliminate debts for people who are overwhelmed by their bills. Chapter 7 and Chapter 13 bankruptcy may be available if people are eligible for them. People who are considering filing for bankruptcy might want to meet with legal counsel to find out which chapter is more appropriate for their financial circumstances. Attorneys may then draft the appropriate petitions and help their clients to complete their schedules that will need to be submitted to the court. Upon the filing of the bankruptcy petitions, the courts will issue automatic stays to enjoin the creditors from engaging in any further collection activities.