If a creditor doesn’t file a timely proof of claim on a debt in your Chapter 13 case, you pay nothing on that debt.
Our last blog post was about Chapter 13 “adjustment of debts” cases in which you don’t pay anything on any of your “general unsecured” debts. In parts of the country where that’s allowed, those debts are fully and forever discharged after you pay nothing. That’s a pretty good debt “adjustment.”
But that can happen only in certain circumstances, with certain combinations of debts, assets, income and expenses. What’s much more common is a Chapter 13 case in which you would pay nothing only to certain creditors. That happens often because creditors regularly fail to file their proofs of claim on time with the bankruptcy court.
Sometimes that has little or no effect on how much you pay into your Chapter 13 plan before it’s completed. But sometimes it makes a huge difference. It could potentially save you lots of money, or even significantly shorten the time you’re in your payment plan.
Proofs of Claim in Chapter 13
Chapter 13 cases are usually 3- to 5-year payment plans. You would usually file one so that you could focus on paying certain special debts. Those special debts are either secured or “priority” debts. For example, you may want to catch up on arrearage on your home mortgage so that you could keep your home. Or you may need to pay income taxes that wouldn’t be discharged in a Chapter 7 case. The rest of your debts—“general unsecured” ones—usually just get whatever money you have left over the course of your Chapter 13 plan.
The Chapter 13 documents that your lawyer files at the bankruptcy court include a complete “schedule” of all your debts. The creditors on those debts all receive notice of your case. They are required to file a “proof of claim” stating how much you owe and the nature of the debt. A creditor that fails to file a timely proof of claim receives nothing through your Chapter 13 case. Then, unless the debt is of a kind that does not get discharged, it gets discharged when you successfully complete your case.
Focus on “General Unsecured” Debts
As mentioned above, you usually WANT to pay certain debts—such as a home mortgage arrearage and nondischargeable income taxes. So you want to be sure certain creditors DO file proofs of claim.
But usually you don’t care whether any particular “general unsecured” debt gets paid. In fact if it saves you money, you prefer that such creditors DON’T file a proof of claim. So the question is, what happens when a creditor with a “general unsecured” debt fails to file a timely proof of claim?
It depends on the terms of your Chapter 13 plan.
When It Doesn’t Make Any Monetary Difference
Many Chapter 13 plans have a designated amount that the debtor is paying towards the “general unsecured” debts. That amount is essentially what’s left over after the secured and priority debts are paid. Usually that’s less than the total amount of the “general unsecured” debts—often much less.
For example, if you have $50,000 in “general unsecured” debts you may have only $5,000 available to pay on those debts over the 3-to-5-year span of your plan. That’s a 10% payment plan. If one creditor with a $10,000 debt fails to file a proof of claim, it usually wouldn’t make a difference. You’d likely still need to pay $5,000 towards your “general unsecured” debts. But now that same amount would be distributed over the remaining $40,000 of debts. So you’re paying 12.5% of the remaining $40,000 in debts. Your same $5,000 is just spread out over fewer debts, with no monetary difference to you.
When It Does Make a Monetary Difference
Although not terribly common, there are Chapter 13 plans requiring the debtor to pay the “general unsecured” debts in full. That’s a 100% plan. If one creditor fails to file a timely proof of claim, the amount the debtor must pay is reduced dollar-for-dollar. Not having to pay that debt can result in a lower monthly plan payment, a shorter plan, or both.
If the debt or debts without a filed proof of claim is/are large, this can significantly shorten your case.
A similar result can happen in a high percentage payout case, with a twist. Take the example of a debtor paying 90% of the “general unsecured” debts. If no proof of claim is filed on a significant debt, the money that had been earmarked for it would likely go to the other debts. But once all the “general unsecured” debts with proofs of claim are paid 100%, the debtor would not have to pay any more. That Chapter 13 case would be shortened accordingly.
Every once in while a creditor or set of creditors fail to file proofs of claim so that little or no “general unsecured” debts are left. Conceivably that Chapter 13 case could be over in a matter of just a few months, instead of years.
Definitely talk with your own bankruptcy lawyer about this, because different Chapter 13 trustees and judges may have different practices and procedures. Chapter 13 trustees sometimes file proofs of claim on behalf of creditors to avoid a missed deadline. Or a bankruptcy judge may determine that a creditor did not get adequate notice of your bankruptcy case in order to be held to the proof of claim deadline.
Also, your lawyer can tell you the creditors’ deadline to file their proofs of claim. Then you can monitor the filed proofs of claim and their potential impact on your case.