If a creditor’s proof of claim is too large, you may need to object to it to avoid dismissal of your Chapter 13 case.
Our last blog post was about two situations when it’s worth objecting to a creditor’s proof of claim in a Chapter 13 “adjustment of debts” case. Today we present two more such situations.
Often the Creditors’ Proof of Claim Amounts Don’t Matter
Often, the amount of money you would pay under Chapter 13 towards your “general unsecured” debts is a fixed amount. It’s based on what you can afford to pay during your case, after paying off any “priority” and secured debts. Because there’s usually a fixed dollar amount that is spread among the “general unsecured” debts, shifts in the amount of such debts often do not affect how much you pay in your Chapter 13 plan. Since it makes no monetary difference to you, in these situations you usually don’t bother disputing the debt amounts.
Our last blog post referred to two situations when the creditors’ proof of claim amounts DO matter—on “priority” and certain secured debts. These are debts in which you pay the debt in full during your Chapter 13 case. So every dollar by which a proof of claim is higher than expected is an extra dollar you’d have to pay.
100% Chapter 13 Plan
In a relatively small portion of Chapter 13 cases, the debtor pays all creditors in full—a so-called “100% Plan.” In those cases, you’d pay the full amount of all allowed proofs of claim through your payment plan. So if a creditor files a proof of claim on a debt that isn’t valid, or for an amount that is excessive, your bankruptcy lawyer must file an objection to prevent it from being paid.
There’s an additional concern here. Chapter 13 cases are not allowed to last more than 5 years. If there is more debts than you can afford to pay off in 5 years, your case is subject to being dismissed—thrown out. That could happen if one or more creditors filed unexpectedly high proofs of claim.
Here’s an example. Say that you have $30,000 in expected “general unsecured” debts. Your home has $50,000 in equity beyond what the homestead exemption protects. So under Chapter 13 you must pay your $30,000 in “general unsecured debts” in full to protect your home. Let’s assume that you are making Chapter 13 plan payments of $500 per month. 5 years, or 60 months, of $500 payments would total $30,000. (Assume no “priority” or secured debts, and disregard trustee and attorney fees to simplify the math.)
If a creditor files a proof of claim for $10,000 more than you expected, this would be a problem. Now you have debts totaling $40,000 instead of $30,000. At $500 per month, that extra $10,000 would take an additional 20 months to pay off, a total of 6 years and 8 months. But that would not be allowed since Chapter 13 payment plans must be completed in 60 months—five years. Your case could be dismissed unless you could afford to pay more each month—about $667—to get it done within that five years.
So, if you had valid grounds for objecting to an unexpectedly high proof of claim, you should object. If you succeed, you’d save that much money, and avoid your case from being dismissed.
Here’s a second situation when unexpectedly high proofs of claim could result in the dismissal of your case, unless you successfully objected.
Under Section 109(e) of the Bankruptcy Code you can’t be a debtor in a Chapter 13 case if you owe too much money. The maximums are $394,725 in unsecured debts and $1,184,200 in secured debts (as adjusted for inflation effective April 1, 2016). So if an alleged creditor files a questionable proof of claim which pushes you beyond these limits, that could bounce you out of your Chapter 13 case.
If so, you may instead have to file a Chapter 7 case and do without the benefits of Chapter 13. Or you may have to do a Chapter 11 “reorganization,” a much more expensive procedure than Chapter 13. Or finally, you may have to deal with your debts without the benefit of any bankruptcy alternative.
So instead you’d object to the proof of claim so that you can stay in the Chapter 13 case.