If you want secured creditors to be paid in your Chapter 13 plan, they must file proofs of claim. Let’s use the example of a vehicle loan.
A debt is secured if the creditor has a lien on something you own. The lien gives the creditor rights against that thing you own. That usually includes the right to repossess it if you don’t pay the debt.
Let’s focus on what’s probably the most common kind of secured debt: a vehicle loan. When you finance your purchase of a car or truck, your lender becomes its lienholder. To secure the loan the lender requires you to give it a lien on the vehicle. That lien is a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37) of the Bankruptcy Code)
Bankruptcy discharges—legally writes off—most debts, including secured debts. But that just discharges the personal liability on the debt itself. The lien—the lender’s right to repossess—is not erased by bankruptcy. If you want to keep a vehicle when you go through bankruptcy, you have to deal with the lien. Generally, unless you’re surrendering the vehicle, the way to deal with the lien is to pay the debt owed.
(With “cramdown” you can pay less than the full debt, based on the value of the vehicle. But you still have to satisfy the lien. “Cramdown” only applies to loans at least 2 and a half years old,)
Chapter 13 Plan
Let’s say you bought a used vehicle two years ago (so no “cramdown”). Because of other financial pressures you’d recently fallen two payments behind, totaling $850. Part of the reason you filed a Chapter 13 case is to stop the vehicle from being repossessed. Keeping it is a huge priority for you. You definitely need the vehicle to commute to work and to get your kids everywhere—to keep your life together.
Assume your Chapter 13 payment plan says that you’ll resume regular monthly payments and will catch up on the $850 through 10 monthly payments of $85. Almost for sure your lender would not allow you that much time to catch up otherwise. Chapter 13 law usually requires them to give you this amount of time. As a result you have more money to live on and maybe to pay other urgent creditors.
The Crucial Role of the “Proof of Claim”
Your Chapter 13 plan could explicitly state that your vehicle lender is going to be paid. The bankruptcy judge could formally order that the plan is approved (“confirmed”). You could pay the plan payments perfectly to the Chapter 13 trustee. But your lender still would not receive anything from the trustee without one more step. The lender must file a “proof of claim” with the bankruptcy court.
A “proof of claim” is a rather simple form on which your lender states how much you owe and usually provides some documentation showing the basis for the debt. (Section 501 of the Bankruptcy Code)
Lenders want to be paid and so would normally file proofs of claim to have that happen. But they sometimes mess up. They usually have 90 days from the date of your “meeting of creditors” to file proofs of claim. Since that “meeting” is about a month after your bankruptcy lawyer files your case, the deadline is a specified date about four months into your case.
You get a formal notice—as do your creditors—giving that exact deadline. Your lawyer should review the filed proofs of claim right after that deadline. Be in touch with the lawyer to find out if your auto lender filed an appropriate proof of claim. (At the same time you can discuss the proofs of claim filed or not filed by other important creditors.)
You have 30 days after the creditors’ deadline to file a proof of claim on behalf of any creditor that messed up and did not file one on time. Your Chapter 13 trustee has the same right. Different trustees have different practices about whether not they file proofs of claim for creditors, and if so when, so talk with your lawyer about this.
To keep a vehicle, you have to satisfy the vehicle lender’s lien on that vehicle. That means you have to arrange to pay that lien. Your Chapter 13 trustee cannot pay the lender under the terms of your court-approved payment plan without a proof of claim. If the lender neglected to file one on time, make sure that either you or the trustee files a proof of claim for the lender.