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.
Claims play a major role in Chapter 13 bankruptcies. They are essentially superfluous in a “no asset” Chapter 7 so they are often not filed in such cases except for secured creditors. If there are non-exempt assets that will be liquidated in a Chapter 7, then it is an “asset” Chapter 7 and claims serve a similar function as I’ll describe for the Chapter 13.
In a Chapter 13, a plan is proposed by the Debtor that spells out what the Debtor will pay in over time. The plan also describes how various creditors will be treated. Some districts, such as the Eastern District of Kentucky, treat provisions of the plan as motions that become orders of the court once the plan is confirmed (blessed by the court). In such districts the plan provisions can “cram down” or “strip off” liens by secured creditors based on the value of the asset they have a lien against pursuant to 11 U.S.C. Section 506. However, I am venturing a bit off of the topic of claims.
For a creditor to actually receive what is owed to them per the plan, they must file a claim. There is a form available just for this purpose and the creditor can either send it in to the court clerk to be electronically filed or, if they have set up an account, they can electronically file it themselves. The claims for most creditors (other than governmental agencies) must be filed by a deadline specified in the Notice that is sent out to all creditors when a bankruptcy is filed. If they miss the deadline, their claim will likely be denied and the full debt discharged as to the Debtor.
The claim also puts the Debtor on notice of any additional fees and penalties that the creditor may be entitled to receive under the loan contract or by law. It is up to the Debtor to review the claims and object to anything that is erroneous or to excessive fees. It is also good practice to object to secured claims if the plan calls for them to be crammed down or stripped off. The reason to object to claims is because they are presumed to be sufficient proof, on their face, to establish the existence and amount of a debt. This is because there are hefty penalties to filing false claims. In the next post I will give a little more detail as to when it is beneficial to object to a claim.
Claims play a major role in Chapter 13 bankruptcies. They are essentially superfluous in a “no-asset” Chapter 7 so they are often not filed in such cases except for certain secured creditors. If there are non-exempt assets that will be liquidated (reduced to a monetary value by being sold) in a Chapter 7, then it is an “asset” Chapter 7 and claims serve a similar function as I’ll describe for the Chapter 13.
In a Chapter 13, a plan is proposed by the Debtor that spells out what the Debtor will pay in over time. The plan also describes how various creditors will be treated. The categories of creditors typically include unsecured, priority unsecured (such as recent tax debt), administrative costs (such as attorney fees), and secured debt. Each category receives different treatment.
For a creditor to actually receive what is owed to them per the plan’s provisions, they must file a claim. There is a form available just for this purpose and the creditor can either send it in to the court clerk to be electronically filed or, if they have set up an account, they can file it electronically. The claims for most creditors (other than governmental agencies) must be filed by a deadline specified in the Notice that is sent out to all creditors when a bankruptcy is filed. If they miss the deadline, their claim will likely be denied and the full debt discharged (depending on the category of debt) as to the Debtor.
The claim also puts the Debtor on notice of any additional fees and penalties that the creditor may be entitled to receive under the loan contract or by law. It is up to the Debtor to review the claims and object to anything that is erroneous or to excessive fees. If a plan proposes to pay even unsecured debts at 100% of the claim, then it is even more important to scrutinize the claims and object to them if they are wrong. This could reduce the overall plan payment. However, there are hefty penalties to filing false claims so most of the ones I review are accurate.
I recently responded to this question from a non-client: “I’m just wanting to know in a Chapter 13 case what all is my lawyer to do. Are they supposed to represent me in court and are they really on my side?”
With this answer:
There is now a “flat fee” approved in the Eastern District of Kentucky for Chapter 13 bankruptcies and a court approved document that spells out what the client is supposed to do and what the attorney is supposed to do. If you agreed to this flat fee, you can obtain a copy of the Rights and Responsibilities form from the bankruptcy court clerk.
A new set of local rules supplementing the Federal Rules of Bankruptcy Procedure (FRBP) were ordered into being for the Eastern District of Kentucky Bankruptcy Court. These local rules went into effect on 1/1/2013. For the most part, they merely codify current practices or fill in some gaps. I will highlight a few of the more important changes discussed at a recent training sponsored by the Fayette County Bar Association.
- 1002-2 If a debtor is a corporation, LLC, etcetera, be sure to also file authority to file.
- 1007-2 Mailing lists: Be sure to find the right address for the Kentucky Department of Revenue and the IRS. These can be found on the right address.
- 1009-1 A motion for the case for the meeting of creditors to be heard in a different location, you must file that motion with the petition.
- 2002-1 Notice requirements generally are 14 days unless there is a different, specific rule. Be sure to file a motion to shorten time if you need that to be less than 14 days.
- 2003-1 Trustees can continue the meeting of creditors without a court’s order. If the trustee does continue the meeting, the counsel for the debtor must send out notice to all creditors. Only file a motion if the trustee will not agree to a continuance and then explain the circumstances.
- 2004-1 A motion for an examination under 2004 does not need a hearing and the order will be entered by the court after three business days without an objection.
- 2016-2 The presumptively reasonable fee of $3,500.00 no longer includes the court filing fees.
- 3002.1-1 When a secured creditor files notice of post-filing fees, the trustee no longer has to object – they simply will not be paid through the plan.
- 3015-2 A modification to a Chapter 13 plan, must be filed seven (7) days prior to the hearing on confirmation to be considered.
- 3015-3 Objections to a modified plan must be filed within seven (7) days after the first meeting or creditors or the date of the filing of a modified plan, whichever is later.
- 3015-4 Adequate protection payments will not accrue or be paid until the creditor files a proof of claim. But, if this happens and a case is dismissed, the trustee will pay those adequate protection payments that have accrued.
- 4001-1 Motions to lift the automatic stay filed prior to the meeting of creditors, must give the trustee fourteen (14) days after the meeting to object. If the trustee does not object, then the property is deemed abandoned.
- 4003-2 A motion to avoid a judicial lien that encumbers exempt property must include more specific information to identify the lien: filing date, county filed, book and page number, and the lien (style of underlying case) to be avoided. The property, value of property, amount of other liens on the property also must be in the motions as well as the amount and statutory provision of the claimed exemption. A non-possessory and non-purchase money lien must identify similar information. There is specific language that must be in the order. These motions must now be filed separate from the proposed plan whereas they used to be included in the plan. Unfortunately, if there is a judgment lien filed, but the debtor owns no real property going into the bankruptcy, then one cannot request this 522(f) relief. By law, the judgment and lien become void upon entry of the discharge order.
- 4004-5 Debtor’s counsel must file a Local Form 4004-5a, within thirty (30) days of the trustee filing their Certification of Plan Completion and Request for Discharge.
- 7026-1 Provisions of FRCP 26(f) do not apply with adversary proceedings or contested matters.
- 9013-1 Orders only need to list parties to be served that are NOT served by the ECF system.
- 9070-1 How exhibits are filed are changed and this is set forth in the Administrative Procedure Manual. Essentially, each exhibit should be a separate attachment rather than lumped together. A clear and concise description of the exhibit should be input into the ECF system.
- What your bank CAN and CANNOT do when you file bankruptcy
- Tax Time!
- Interest Rates on Secured Claims in Chapter 13 Cases in the EDKY
- CAUTION: Tax Refund
- When Business Owners Should File Bankruptcy
- To File or Not to File: Attorney decision making
- Deadlines for Filing Prepetition Tax Returns in Chapter 13 Cases
- Delinquent Property Tax Claims in Chapter 13 Cases
- Lessons Learned the Hard Way
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