William & Mary Business Law Review


Many, perhaps the majority, of Chapter 13 cases end up being converted to Chapter 7. The converted Chapter 7 case is not a new case, it is a continuation of the case that was commenced with the filing of the original Chapter 13 petition. However, there are important structural differences between the two chapters, including over what constitutes property of the estate. This creates some thorny issues surrounding whether property of the estate as generally defined in section 541(a) of the Bankruptcy Code or property of the estate as specifically defined in Chapter 13 controls in determining the scope of the estate in the converted case. Initially, the circuits were split on this question as it related to earnings and other property acquired by the debtor after filing. Congress resolved that matter in 1994, adopting a new section 348(f)(1), which makes clear that such after-acquired property is excluded from the Chapter 7 estate. In making that choice, the legislative history cited the strong public policy favoring repayment over liquidation and the desire to avoid creating disincentives to debtors' choosing Chapter 13 at the onset. However, the text new subsection did not address all the issues affecting property of the estate, including allocation of increases in the net value of property that was in existence at the time of filing. The legislative history, however, did, suggesting that the intent was to permit the debtor to at least retain increases attributable to payments made secured debt. Nevertheless, once more, the courts have split on this issue, with the most antipodal positions explicable in terms of differing approaches to statutory interpretation. Moreover, there are any number of intermediate positions that can be found in the decisional law between those extremes. This wide spectrum of different approaches to the problem has introduced a high degree of costly uncertainty and disuniformity into the system. In attempting to supply a definitive answer, this Article determines that both of the extreme positions--all such property stays with the debtor, or all such property inures to the Chapter 7 estate--are plausible but neither is without its shortcomings. Therefore, it concludes the only way definitively to resolve the matter without the inordinate delay entailed in waiting for the issue to work its way through the circuit courts, is through legislation. Therefore, this Article, lays out the language and rationale for such a reform effort. It is contended that this alternative approach addresses the weaknesses in all of the current positions and represents overall a solution that better advances the core policies underlying the consumer bankruptcy system.