Often creditors’ proofs of claim do not affect the amount you have to pay in a Chapter 13 case. But sometimes they make a huge difference.
In our last blog post we introduced “proofs of claim.” A creditor files a proof of claim in your bankruptcy case to say how much it thinks you owe. The proof of claim says why you owe the money, often backed up with some documentation.
In that blog post we got into some practical sides to proofs of claim in Chapter 7 “straight bankruptcy” cases. Today we start the same with Chapter 13 “adjustment of debts” cases. Because there’s a lot more to this in Chapter 13, we’ll start today on proofs of claim for just one kind of debts, “general unsecured” ones.
General Unsecured Debts
An unsecured debt is simply one that is not backed up, or secured, by a lien on something you own.
There are two kinds of unsecured debts: “priority unsecured” and “general unsecured.” “Priority” debts are special categories of debts that are treated better—much better—in bankruptcy. For example, generally they get paid in full through the bankruptcy process before general unsecured debts get anything at all.
Examples of priority debts are unpaid child and spousal support, and recent income taxes. General unsecured debts are all the remaining unsecured debts that don’t fit within the different priority debt categories.
Proofs of Claim in Chapter 13 Cases
Filing a Chapter 13 case helps an overextended person reorganize, and often greatly reduce, their debts. You keep your assets while you use your present and future income to repay some portion of your debts (or rarely, all of your debts) over the course of a three-to-five-year plan.
For a creditor to get paid it has to file a valid proof of claim with the bankruptcy court. Then it can receive whatever the court-approved payment plan has earmarked for it. If a creditor doesn’t file a proof of claim, either you or the Chapter 13 trustee can do so on its behalf. That tends to happen when that debt is important to pay.
There is a strict deadline for creditors to file proofs of claim. And that deadline is quite short, within 90 days after the “meeting of creditors, which is usually about a month after the Chapter 13 case is filed. As long as the creditor was mailed notice of the case, a late proof of claim gets rejected—as if it was never filed.
What Difference Do General Unsecured Proofs of Claim Make in Chapter 13 Cases?
You and your bankruptcy lawyer should review all proofs of claim filed in your case, including the general unsecured ones. But be aware that often who files proofs of claim and the amounts on them make no practical difference. Sometimes they make a big difference. Sometimes that difference is in your favor. Sometimes it’s not.
When the General Unsecured Proofs of Claim Make No Difference
The amount of money you pay to all your creditors in a Chapter 13 case does not change by one penny in the following circumstance:
- 0% payment plans on your general unsecured debts: Many bankruptcy courts allow you, in the right circumstances, to pay nothing on these debts. That’s usually because all of your available income going into your payment plan is going to secured and/or priority debts. There’s no money available to go towards the debts that are lowest on the totem pole—the general unsecured debts. Since those debts are being paid 0%–nothing—it doesn’t matter how much money those proofs of claim represent.
- Payment plans that pay whatever money is left over to your general unsecured debts: Most Chapter 13 cases pay a certain amount of money to the secured and priority debts. Then whatever amount is left over throughout the life of the plan goes to the general unsecured debts. The amount of money owed in that pool of debts does not change the amount that gets paid to them. They’re just getting the leftovers. So the total amount of money in the general unsecured proofs of claims makes no difference.
- Plans that require you to pay a certain set amount to the general unsecured debts: For various reasons, you may need to pay a specific amount to these creditors before you can complete the case. For example, you may be required to do so to be allowed to keep an asset that you would otherwise lose in a Chapter 7 case. Again, the amount of total general unsecured debts doesn’t matter—you must just pay that specified amount regardless.
When the General Unsecured Proofs of Claim Can Make a Lot of Difference
The amount of money you pay to your creditors in a Chapter 13 case can change a lot in the following situation:
- 100% payment plans on your general unsecured debts: Not often, but sometimes, you are required to pay your general unsecured debts in full. That may be because you have relatively high income compared to your debt. So, during the period of time you are in the Chapter 13 case you have enough disposable income to pay off all the unsecured debts. In this situation, every dollar more among the general unsecured proofs of claim adds a dollar to the amount you must pay. But in the same way, every dollar less among those proofs of claim is a dollar less that you need to pay before finishing the case.
You and your bankruptcy lawyer need to review all proofs of claim particularly carefully in this situation. Creditors’ proofs of claim are by no means always accurate. Proofs of claim are sometimes even filed in the wrong cases! They can be invalid for being filed late. The claim may be legally stale and uncollectable. Your lawyer needs to object to those proofs of claim, which often gets rid of them without much of a fight.
Occasionally a major creditor or two fails to file an expected proof of claim. Or they do not file one until after the legal deadline. With a 100% plan, that could reduce the amount you have to pay in your Chapter 13 plan. That would let you finish your case sooner—sometimes much, much sooner—than originally expected.