557 B.R. 161
Bankr. W.D. Mo.2016Background
- Chapter 13 debtors Keith and Michele Portell received a postpetition inheritance of $221,510.53 payable solely to Keith in month 34 of a confirmed plan.
- The confirmed plan (below-median debtors) provided a liquidation-analysis pot of $23,130.07 yielding a 40.334% dividend to allowed unsecured creditors; plan was then ~34 months in and expected to run ~63 months.
- Debtors moved to spend the inheritance to (a) pay Keith’s separate creditors in full and (b) pay off the jointly secured residential mortgage; they proposed not to use the funds to pay Michele’s separate creditors (leaving ~ $12,000 of her separate debt unpaid).
- Chapter 13 Trustee objected, arguing the inheritance is estate property, constitutes disposable or "future" income, and that § 1329 plan modification is required to force payment to all creditors (arguing good-faith concerns).
- Court found Missouri statute Mo. Rev. Stat. § 451.250.1 treats inheritances received during coverture as the recipient spouse’s separate property not liable for the other spouse’s debts, and the estates were not substantively consolidated.
Issues
| Issue | Trustee's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether the postpetition inheritance must pay both spouses’ creditors | Inheritance is property of the estate and should be applied to all claims | Missouri law makes the inheritance Keith’s separate property; absent substantive consolidation, Michele’s creditors cannot reach it | Keith’s inheritance is his separate property under Missouri law and need not pay Michele’s separate creditors |
| Whether the inheritance triggers mandatory plan amendment under § 1329 | The inheritance is a substantial change in circumstances requiring amendment to a 100% plan and payoff of all claims | An amended plan may be required, but it need only commit the inheritance to Keith’s creditors and joint obligations | The inheritance is a substantial change but amendment need only (1) pay Keith’s separate creditors in full, (2) pay the mortgage, and (3) continue payments so Michele’s unsecured creditors receive the original 40.334% dividend |
| Whether the inheritance counts as "disposable income" or "other future income" (affecting commitment) | Inheritance is disposable/future income that must be paid to unsecured creditors | Inheritance is more properly characterized as property of the estate (or separate property) and not necessarily subject to disposable-income rules for modification | Court rejects reliance on Chapter 13 disposable-income rule for modification (§1325(b) inapplicable to modifications), treats inheritance as property but finds Debtors’ proposed commitment complies with §1322(a)(1) as applied |
| Whether Debtors’ proposal lacks good faith under § 1325(a)(3) | Refusing to use Keith’s inheritance to pay Michele’s creditors is bad faith and provides an unfair windfall | State law permits allocation of the inheritance to Keith’s estate; following state law is not per se bad faith | Court finds Debtors acted in good faith; treating Keith’s inheritance as available only for his creditors is not bad faith |
Key Cases Cited
- In re True, 285 B.R. 405 (Bankr. W.D. Mo. 2002) (state-law separate-property treatment of non‑filing spouse prevents use by other spouse’s bankruptcy creditors)
- In re Honey, 167 B.R. 540 (W.D. Mo. 1994) (postpetition inheritance treated as disposable income in Chapter 12 context to prevent debtor windfall)
- Carroll v. Logan, 735 F.3d 147 (4th Cir. 2013) (majority view that §1306 expands estate to include postpetition acquisitions in Chapter 13)
- Norwest Bank of Nebraska v. Tveten, 848 F.2d 871 (8th Cir. 1988) (conversion of nonexempt to exempt property not fraudulent absent extrinsic evidence of fraud)