Kentucky Bankruptcy Law

Counsel with Care

Objecting to Claims in a Chapter 13

I spoke previously about objecting to a claim filed in a Chapter 13 bankruptcy as it relates to “cramming down” or “stripping off” secured debt. In that article I explained the role of creditors’ claims, so I will not elaborate on that here. A more pressing reason to object to a claim filed is if your Chapter 13 plan calls for unsecured creditors to be paid in full. This is referred to as a 100% plan.

I suppose the first thing to explain is why anyone would bother filing bankruptcy if they can pay their creditors in full. Essentially, Chapter 13 bankruptcy forces all creditors to play ball by the same rules. It puts each creditor on the same footing within their class. If you have one creditor who is pursuing a lawsuit or post-judgment collection activities, such as wage garnishment, the debtor may not have the resources to work things out with other less aggressive creditors. The debtor essentially enters into a “debt” spiral because they can only deal with one or a few creditors at a time instead of a global resolution of debt with all creditors. Chapter 13 stops the debt spiral and makes that one or few aggressive creditors operate under the same plan as all the other creditors. So, a 100% plan can allow a global resolution of debt in an orderly fashion rather than a rush to the courthouse by aggressive creditors.

Another benefit to the 100% Chapter 13 plan ties in with the one just discussed: payments can be spread over five (5) years. A debtor who could not afford to make large payments to a creditor that demands being paid in full in just one year very well be able to afford to pay in full over the five-year period of a Chapter 13 plan. An additional benefit is that people are facing interest rates that of 29% (usurious in my opinion), but under a Chapter 13 payment plan unsecured creditors cannot demand payment of the post-petition interest. Along these same lines, the debtor may have fallen behind on secured debt payments, such as their house payment. Their mortgage company may demand payment in full immediately or they will foreclose on the property. Under the Chapter 13 plan, the arrears can be spread over the plan period.

So, a 100% Chapter 13 plan can provide for the orderly resolution of debt, halt exceedingly high interest rates, and avoid the spiral of debt. This brings up to the reason for objecting to claims in a 100% plan: you can also pay off a 100% plan early! Simply put, if you have $50,000.00 in unsecured debt, but only $30,000.00 worth of claims are filed, the Chapter 13 payment that would resolve the debt in full over five years may allow you to be finished in only three years. This gives impetus to examining creditor claims closely in a 100% plan, because if some of the amounts owed are inflated or unsupported, an objection could allow you to be done early with your bankruptcy.

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June 17, 2013 - Posted by | Bankruptcy, Chapter 13, Discharge, Plan, Plan payments, Planning, Proof of Claim, Secured loan arrears | , , , , , , , ,

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