Two recent decisions, one from the Maine Bankruptcy Court, and another from the Massachusetts Bankruptcy Court, are instructive regarding the power the Courts have over assets of debtors and third parties.
The first decision, In re Lombardi, enabled a Massachusetts Chapter 13 Trustee to modify a debtor's Chapter 13 plan to include an inheritance that the debtor was entitled to receive during the life of the Chapter 13 plan. The debtor filed her case in January 2011, and during the 5 year time period within which the plan would need to be paid, the debtor's mother died, entitling her to an inheritance. The Court approved the Trustee's request to modify the plan to include all of the inheritance since the debtor had not completed the plan prior to the debtor's mother's death. The lesson here is that, in Chapter 13 cases, any inheritance received during the life of a Chapter 13 plan becomes property of the bankruptcy estate and must be paid to creditors, unless the debtor's mother creates a spendthrift trust in her will. A spendthrift trust protects the debtor's inheritance by sheltering the debtor's share of the mother's probate estate. If debtor's mother had set up a spendthrift trust, the Chapter 13 Trustee could not have demanded the inheritance.
The second case is Hull v. Bishop, Maine Bankruptcy Court case. Bishop and her non-filing husband owned real estate (not their home) on which there was a mortgage. The Chapter 7 Trustee claimed, and the Court found, that the mortgage was defective. The Court further found that the Bankruptcy Code gave the trustee the power to defeat the mortgage and step into the position of the mortgagee. In addition, the Court concluded that the Trustee had the right to sell the co-owned real estate, with the debtor's portion of the real estate free of the mortgage, although the mortgage would likely be effective against the non-filing debtor's share of the real estate sales proceeds. Many debtors enter bankruptcy thinking that co-owned property is protected from a bankruptcy trustee. Actually, the opposite is true, with the only protection for that property being an effective mortgage that covers the total value of the property.