Trustee Must Return Funds to Debtor upon Pre-Confirmation Dismissal

The chapter 13 trustee by law must return post-petition funds to the debtor upon pre-confirmation dismissal of a bankruptcy overriding state law permitting the Division of Child Support to levy against any person holding the debtor’s funds. Commonwealth of Va., Dept. of Soc’l Serv. v. Webb, No. 17-2328 (4th Cir. 2018).

This case is out of Virginia. Pre-confirmation the debtor paid $3,000.00 to the trustee. No plan was confirmed leading to dismissal. The Virginia Department of Social Services, Division of Child Support, presented the trustee with an Order to Withhold the funds for payment to the Division.

Relying on section 1326(a)(2), which provides: “If a plan is not confirmed, the trustee shall return any [post-petition] payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b),” the bankruptcy court denied the Department’s request. The district court affirmed.

On appeal, the Fourth Circuit affirmed the courts below, holding that section 1326(a)(2)’s mandatory language was clear and dispositive.

Unless one of the two exceptions applied, the trustee must return funds to the debtor.

Congress made exceptions for child support payments in other sections of the Code, but not here.

The court felt that allowing the Department’s claim would start a race among creditors to see who could get a claim filed first with the trustee.