Feb 23, 2017

Creditors must file a proof of claim by the deadline in order to be included in Chapter 13 bankruptcy plans

When an individual files for a Chapter 13 bankruptcy protection, she is allowed to repay her debts over a period of time up to five years through a court-approved payment plan. During the bankruptcy, her creditors are barred from attempting to collect on their respective debts unless first granted permission by the bankruptcy court.

Generally speaking, in order to be included in a Chapter 13 payment plan, a creditor must file a proof of claim, which sets forth both the amount due and owed and the arrearage owed to the creditor as of the date she filed for bankruptcy protection. Unless the debtor successfully objects to the proof of claim (i.e., convinces the court of some legal reason why the money is not owed or should not be paid through the bankruptcy), the creditor should be included in the plan to receive payments.

The Federal Rules of Bankruptcy Procedure provide a deadline for filing a proof of claim if a creditor wishes to be included in a Chapter 13 plan. While it is generally accepted that unsecured debts such as credit card debt will not be paid through the plan unless the creditor files a proof of claim by the deadline, there has been some confusion over whether this deadline applies to creditors holding secured claims. Previously the local practice in the Northern District of Illinois was that when the Chapter 13 plan was filed proposing repayment of the pre-petition default to the secured creditor, that secured creditor could opt out and not file a claim. If such plan was confirmed, a Chapter 13 Trustee was to disburse payments to the secured creditor according to the terms of the confirmed plan.

However, this local practice was brought to everyone’s attention when the Seventh Circuit Court of Appeals, whose jurisdiction includes Illinois, issued its decision in the case of In re Pajian, in summer of 2015. For the first time, the Seventh Circuit clarified that the proof of claim deadline established by The Federal Rules of Bankruptcy Procedure applies to both unsecured and secured creditors. Accordingly, the Court held, if a secured creditor does not file its proof of claim by the deadline, it will not be included in the Chapter 13 plan and will not receive payments from the bankruptcy trustee.

So what are the upsides and ramifications of this decision? Requiring all creditors to file by the same date, at least in theory, puts the debtor and the Court on timely notice as to what amounts are due and consequently allows the debtor to suitably propose a confirmable plan. While a secured debt, even if not included in the plan, survives a discharge in a Chapter 13 bankruptcy, collecting that debt five years down the road can be a cumbersome process when all that could have been required was filing a form with the bankruptcy court. Also, requiring a secured creditor to file a proof of claim provides the debtor with loan information that may have not otherwise been easily attainable, such as detailed payment history or specific information about each additional fee charged.

However, is a Chapter 13 debtor prohibited from reaching an agreement with a secured creditor to pay that creditor through a plan, even though the secured creditor has not filed a proof of claim? Is the debtor required to file a claim on behalf of the creditor to ensure its ability to cure the loan default via a Chapter 13 plan? These daunting questions were recently answered by one of the judges presiding in the Bankruptcy Court for the Northern District of Illinois. In In re Hrubec, Judge Donald R. Cassling held that as long as the debtor voluntarily proposes a plan that includes payments to a secured creditor and that creditor has no objection to its treatment under the proposed plan, there is no need for the creditor to file a proof of claim and the plan is not unconfirmable. So it appears that, despite In Re Pajian, some judges may continue to confirm plans in cases where secured creditors did not file their claims.

Having said that, In Re Pajian, is still good law and some judges may not agree with Judge Cassling and may not confirm a plan unless the secured creditor files a timely proof of claim. Even under Judge Cassling’s lenient ruling, a creditor is also out of luck if the debtor objects to an untimely claim or does not propose a plan that favorably treats the secured creditor. While the filing of a mortgage proof of claim may be cumbersome and very time consuming, especially after Dec. 1, 2015, when the amended forms were adopted, it is better to be safe than sorry. Once on file, the claim can always be amended.

Feel free to contact the banking attorneys for additional information to protect your claims in the event of bankruptcy.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by:
Paulina Garga-Chmiel, Associate

This alert originally appeared in the Spring 2017 Banking Focus newsletter.