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Judgement Creditor Serves Writ Of Garnishment Upon Chapter 13 Trustee And Gets Debtor's Money

By Jonathan Alper

A Chapter 13 debtor has the right to convert to dismiss his Chapter 13 case or to convert the case to Chapter 7 at any time provided he acts in good faith. The court will dismiss a Chapter 13 case if the debtor fails to make timely plan payments. When a Chapter 13 case is dismissed the Chapter 13 trustee may be holding money from the debtor?s previous plan payment which money the Chapter 13 trustee has not yet distributed to the creditors. The Chapter 13 trustee is supposed to return the money to the debtor after the dismissal. The debtor is then left to fend for himself against his creditors without the protection of the bankruptcy stay. That?s how it usually works.

A judgment  creditor tried something different in a recent Chapter 13 case in the Orlando Division. A Chapter 13 debtor was unable to keep up with plan payments, and the court issued an order dismissing the Chapter 13 bankruptcy. After the order, the debtor filed a notice of conversion to Chapter 7, and the court converted the case to Chapter 7 immediately thereafter. In between the time the court issued the order of dismissal and the time the debtor filed his notice of conversion the judgment  creditor obtained a state court writ of garnishment against the Chapter 13 trustee. The creditor argued that it was entitled to garnish all the money the Chapter 13 trustee was ordered to pay the debtor.

The bankruptcy court upheld the garnishment against the trustee. This one creditor got all the debtor?s money. In practice, creditors are not usually this aggressive in bankruptcy cases. Most creditors do not that quickly. However, as word of this opinion spreads among the creditor community other creditors with judgments may closely monitor dismissals of Chapter 13 cases and attempt similar garnishments.

If a debtor intends to convert a dismissed Chapter 13 to a Chapter 7 case he most do so promptly. The best practice is to file notice of conversion before the court enters the dismissal order so the court will order the conversion rather than order funds payable to the debtor which funds could be subject to garnishment. The case is In re Fisher, 09-07498.

Full post as published by Florida Bankruptcy Law on September 06, 2010 (boomark / email).