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Objecting to a Creditor’s Proof of Claim in Chapter 13

If you object to a creditor’s proof of claim in your Chapter 13 case, and prevail in that dispute, you pay nothing on that debt.


Our last blog post was about what happens to creditors who fail to file a proof of claim on time in a Chapter 13 “adjustment of debts” case. The creditor’s debt receives no payment through your Chapter 13 plan, and the debt is discharged—written off.

There’s another way to achieve this same result. Your bankruptcy lawyer can object to a creditor’s proof of claim if you don’t owe the debt as stated.

If the Creditor Does Not Respond to the Objection

Creditors sometimes file proofs of claim that are clearly not legally valid. Your debt may no longer be collectable because the statute of limitation has expired. An ex-spouse may owe the debt on which you’re not liable. Someone with the same name as you may owe the debt instead of you.

In these and similar situations your lawyer would likely file an objection to the proof of claim. Otherwise the legally invalid debt would be treated as a legitimate one. That illegitimate claim could share in whatever you are paying other similar debts under your Chapter 13 payment plan.

When there’s a clearly invalid proof of claim, the creditor would likely not even respond to your lawyer’s formal objection. Or if the creditor does respond, there’s a good chance it can be convinced to withdraw its proof of claim. Creditors can be penalized for legally pursuing a clearly invalid debt.

So the creditor may not respond to your lawyer’s objection or may respond but be quickly convinced that the debt’s not valid. Either way, the objection prevails and the bankruptcy judge throws out the proof of claim. You pay nothing on that debt through your Chapter 13 plan.

Even if a creditor believes that you owe the debt, it may still not respond to the objection. Depending on the terms of your Chapter 13 plan, the creditor may decide that the cost of fighting the objection is not worth what you would pay it under the plan. Or the creditor may just mess up and not get around to responding by the deadline. For whatever reason, if a creditor fails to respond timely to your objection, its proof of claim is thrown out. Again, you pay nothing on that alleged debt.

If the Creditor Responds to the Objection

However, if you and your lawyer file an objection to a creditor’s proof of claim, and the creditor responds and appears committed to fighting this fight, then you and your lawyer need to decide whether the fight is worth fighting.

It may not be worth fighting if allowing that proof of claim won’t make any practical difference in your case. Or it may not be worth fighting if the likely practical difference is less than the costs of fighting it.

When Liability on a Debt is a Big Deal

This whole discussion makes more sense if we explain the following. With most debts it’s clear whether or not you owe the debt, and its amount. But with some debts either your liability or the amount you owe, or both, can be very unclear. Indeed, people are often pushed into bankruptcy because of a contentious legal dispute about an alleged debt. Examples include:

  • liability disputes in a multi-vehicle accident with insufficient insurance
  • family fights about a deceased relative’s assets
  • litigation among or between a business’ owners and investors about the operation or closure of the business

So, a complicated dispute or litigation that was raging before the bankruptcy was filed could well just continue on in the bankruptcy court. Both sides’ decisions about whether to continue that fight turns on financial practicalities of the Chapter 13 case.

If you’re in this situation, assume the creditor files a proof of claim showing what it thinks it’s owed.  Presumably you disagree either as to owing anything, or the amount claimed, or both. But you need to decide whether it’s worth objecting to it and bringing that fight to the bankruptcy court. If it doesn’t make any or enough financial difference in your Chapter 13 case, it’s probably not worth objecting. Or it may be worth objecting just to see if the creditor responds. But then if it does, letting the creditor win on its claim.

May Not Be Worth Objecting

There are Chapter 13 payment plans—maybe the majority of them in most jurisdictions—in which most creditors’ proofs of claim makes no difference in what the debtor pays. These are cases in which the debtor basically pays what the debtor can afford during a set period of time. That stream of payments pays certain amounts to any secured and “priority” debts, then whatever’s left over goes to the “general unsecured” debts. Assuming that the disputed debt is a “general unsecured” one—as is usually the case—its amount likely won’t matter.

That’s because the total amount of all “general unsecured” proofs of claim often has no effect on the dollar amount the debtor pays. The pool of “general unsecured” debts gets paid the same amount regardless. The larger total amount of debt in that pools simply shifts around who shares in that amount. The percentage of the debts paid is just reduced to account for more debt in that pool.

Consider This Example

Assume that, as is often the case, you are paying much of your Chapter 13 plan payments to secured and/or “priority” debts. You are catching up on and then paying a vehicle loan, catching up on child support arrearage, and/or paying an income tax debt. Let’s say that over the life of your Chapter 13 case you are paying a total of $15,000 to all your “general unsecured” debts. This is based on what you can afford to pay over your case’s 3-to-5-year life. (The required length is based mostly on your pre-filing income.)

Assume further that you have 10 undisputed “general unsecured” debts totaling $75,000. There’s one more disputed debt, one you don’t believe you owe but the alleged creditor asserts you owe $30,000, on top of the $75,000 you don’t dispute. Without that $30,000 debt, you’d be paying 20% of your “general unsecured” debts—$15,000 paid out of $75,000 owed. With that additional $30,000 claim allowed, you’d be paying about 14% of your “general unsecured” debts–$15,000 of $105,000.

But in most situations, the amount you are paying into your Chapter 13 plan to your “general unsecured” debts—the $15,000 here—would not change. Your other “general unsecured” debts would simply receive somewhat less to make up for the amount the disputed debt receives. In most situations like this you wouldn’t invest the time and attorney fees to dispute that proof of claim. It simply wouldn’t affect you financially.

Sometimes Very Worth Objecting

But there are definitely situations where allowing a disputable proof of claim to stand unopposed would cost you.  It could dramatically increase how much you would have to pay into your Chapter 13 plan before completing it. Such a proof of claim could even jeopardize your ability to complete your Chapter 13 case successfully.

In our next blog post will get into situations when you’d want to object strenuously to an objectionable proof of claim.


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