- A bankruptcy remains on your credit report for up to 10 years.
- Someone who files for Chapter 7 bankruptcy and receives a discharge must wait 8 years before filing for another Chapter 7 bankruptcy.
No creditor who doesn’t file a proof of claim will be paid by a Chapter 13 Trustee.
Let me repeat that…
What does that mean?
Let’s say John Doe has 4 credit cards, one with Wells Fargo, one with Chase, one with Bank of America, and one with HSBC. Let’s also say that each one has a balance owed of $5,000 – or a grand total of $20,000.
Let’s further pretend that John files a Chapter 13 Bankruptcy which proposes to pay 10% to each of his unsecured creditors. If Wells Fargo, Chase, BoA, and HSBC all file claims, then each will get 10% of their claims, or about $500 each and a total of $2,000.
But what happens if BoA doesn’t file a claim? Then there are only $15,000 in claims. John still pays the $2,000 that his disposable income was calculated out to. But now the 3 creditors who did file claims (Wells Fargo, Chase, and HSBC) all share that $2,000 – $667 each. That means that each creditor gets paid 13% of their claims – except BoA who gets paid $0 because they didn’t file a claim.
What if BoA is the only creditor who files a claim? Well, then John is still paying the $2,000 of disposable income, but now BoA is getting paid 40% of their $5,000 claim, while each of the other 3 creditors gets paid $0.
In short – John Doe pays the exact same amount – $2,000 – no matter which creditors file claims or how many creditors file claims. But if certain creditors don’t bother to file claims – they don’t get paid, and the creditors that did file claims get paid a bigger share.
What if we keep the facts exactly the same, but instead of $2,000, John’s disposable income shakes out to $7,000 over the life of his Chapter 13 case? $7,000 is 35% of $20,000, so if all creditors file claims, they’ll get 35%, or $1,750 each.
But now let’s say again that only BoA files a claim. Their total claim is $5,000, which is less than the $7,000 in disposable income that John has to pay his unsecured creditors. BoA gets paid their claim in full – at 100%. Since there are no other claims to pay, his Chapter 13 Plan ends early, and he gets to keep the extra $2,000. The other 3 creditors are shit out of luck.
Now, all of this is overly simplistic because we’re assuming nothing but unsecured and dischargeable creditors. Let’s stop talking about hypothetical numbers and start discussing the issues that affect the analysis.
- In the above examples, we’re assuming that John Doe is eligible for a discharge. If he is, then whatever is not paid to these 4 creditors (whether they files a claim or not) is wiped out upon receipt of the discharge. These 4 creditors cannot pursue John for the unpaid balances after his bankruptcy is over.
- What if John isn’t eligible for a discharge? Maybe he filed a prior bankruptcy case too recently. Maybe he failed to complete his financial management course. Maybe he fell behind on child support after his bankruptcy case was filed. Or maybe he failed to make his plan payments and his case got dismissed. Without a discharge, creditors can then pursue John for any unpaid balances owed after his bankruptcy is over – whether they filed a claim or not.
- If a debt is non-dischargeable (like a student loan) and they don’t file a claim, the debt is still non-dischargeable, which means the full balance and interest will be due when John exits bankruptcy. Since student loans share the same dividend of funds as other unsecured creditors, it is in John’s interest to make sure his student loan creditors file claims so that they can at least get paid down a bit – and to reduce the amount of money his other dischargeable creditors can get their hands on.
- Remember the example where BoA got paid in full, John still had $2k in disposable income, but since the other 3 creditors didn’t file claims, they got paid $0? Why don’t those creditors file claims then? Because all creditors are under a deadline to file their claims. Once that deadline has passed, they can’t file a claim – no matter what else may have changed about the debtor’s bankruptcy case. If the creditor was not duly notified of the bankruptcy in time to file a claim, then their claim is likely going to be non-dischargeable. But if they were duly notified and chose not to file claims on-time, it’s their loss.