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What happens when creditors return payments to the trustee

When Florida residents decide to file for bankruptcy, they will often choose between Chapter 7 and Chapter 13. Unlike a Chapter 7 bankruptcy, Chapter 13 cases involve the debtor repaying his or her debts pursuant to a payment plan that lasts from three to five years. Debtors submit their payments to the bankruptcy trustee, who then disburses them to the creditors.

The court's decision in two cases provides guidance about what happens when a creditor returns money the trustee sends to it. In the first case, a man entered into a repayment plan through Chapter 13 bankruptcy. One of his debts was a tax debt of $7,333 he paid over the life of the repayment plan. After he successfully completed all of his payments, the court granted him a discharge of his remaining unsecured debt balances. The IRS then returned a payment in the amount of $1,565 to the trustee.

In the second case, a woman owed $97,933 to one creditor. When she failed to make her payments, the court dismissed her Chapter 13 case. Then, the creditor returned $1,673 to the trustee after the dismissal. The court found that when debts are discharged, the trustee still must disburse funds that are returned to the other unsecured creditors before sending the leftover funds to the debtor. When a case has been dismissed, the court ruled that the entire payment must be sent back to the debtor.

Filing for bankruptcy under either Chapter 7 or Chapter 13 may provide financial relief to debtors. People might want to consult with a bankruptcy law attorney in order to learn which type of bankruptcy might be more appropriate for their particular financial circumstances. An attorney may then help with filing the petition along with the supporting schedules.

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