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.
11 U.S.C. § 507
- regardless of whether the debt can be discharged
- regardless of your intention to repay the debt, and
- regardless of your relationship to the creditor
- When exactly (i.e. what date) was your bankruptcy case filed?
- What chapter of bankruptcy did you file under? Chapter 7? Chapter 13?
- Was this bill listed on your bankruptcy schedules?
- When was the debt incurred (in this example – what was the date of service)?
- What is the billing address and the statement date?
- If the debt was incurred before your bankruptcy filing date, then it is a pre-petition debt.
- If the debt was incurred after your bankruptcy filing date, then it is a post-petition debt.
- If the debt was listed on your bankruptcy schedules, then check the address to determine if notice was sent out to the right place. Also check the statement date. If within a few days of your bankruptcy filing date, then this may be a harmless “letters crossed in the mail” situation. If the statement date is substantially after your bankruptcy filing date, then you are likely looking at a stay or discharge violation.
- If the debt was not listed on your bankruptcy schedules and you filed a Chapter 7 case that had no distributions (the trustee did not sell any non-exempt assets, recover any preferences, or void any transfers) and the debt was otherwise dischargeable, then the debt is discharged. (This is a result of case law called “Guseck” in the Eastern District of Wisconsin. If you filed bankruptcy in another district, a different result may occur.)
- If the debt was not listed on your bankruptcy schedules and you filed a Chapter 13 case or a Chapter 7 case that had distributions, then the debt is non-dischargeable under 11 U.S.C. sec. 523(a)(3).
- Post-petition debts are generally non-dischargeable with one exception.
- If you file Chapter 13, then later convert to Chapter 7, debts incurred between the filing and conversion dates may be dischargeable under 11 U.S.C. sec. 348(d).
(1) for a tax or a customs duty(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, or equivalent report or notice, if required
(i) was not filed or given; or
(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;
Even if this patterns ends up reversed, § 523(a)(1)(B)(ii) will still prohibit discharge of late-filed returns filed within the past two years. If you owe the IRS or your state department of revenue money for taxes and you can’t afford to pay those taxes, you achieve nothing by postponing the filing of your tax return or not filing your tax return at all.
File your tax returns by the due date. Worry about paying the taxes later. At the very least, by filing your returns on time, you open up more avenues of resolution down the road, especially if you ultimately end up filing for bankruptcy. If you file your returns late – at the very best, you’re forcing yourself to have to wait even longer for them to be dischargeable, and at the very worst – you may be ensuring that they are never dischargeable.
- Prior to filing for bankruptcy, any creditor has the right to file a lawsuit and obtain a judgment against you for the debt you owe. Once your bankruptcy case is filed, any civil litigation that hasn’t begun is prevented and any civil litigation that is pending is terminated.
- Creditors who believe that they can make a criminal case for fraud can press charges with the appropriate prosecuting agency. Bankruptcy does not stop these proceedings.
- If a creditor believes they can make a case for fraud or misrepresentation (523(a)(2)), fraud or embezzlement in a fiduciary capacity (523(a)(4)), or willful or malicious injury (523(a)(6)), then they can file an adversary proceeding to have the debt declared non-dischargeable.
- Enforce a civil judgment that is discharged in bankruptcy. Civil lawsuits and judgments – in and of themselves – are not special debts. Just because a judgment has been entered against you does not mean that the debt cannot be discharged in bankruptcy.
- Creditors cannot seek to collect a debt by threatening criminal prosecution. What does that mean? It means that if they think they have a criminal case, then they should just press charges. They cannot try to strike a deal with you where they drop the charges in exchange for payment from you. If they do, then they are potentially guilty of two things…
- If a bankruptcy case has been filed and they make these threats, then they are in violation of the automatic stay. Acts of criminal prosecution are distinguishable from threats of criminal prosecution. The former is not stayed by bankruptcy, but the latter is stayed. Desert Palace, Inc. v. Baumblit (In re Baumblit), 15 Fed. Appx. 30, 35-36 (2d Cir. N.Y. 2001) and Batt v. Am. Rent-All (In re Batt), 322 B.R. 776, 779 (Bankr. N.D. Ohio 2005).
- Even if a bankruptcy case is not filed, they would be guilty of criminal extortion in Wisconsin, under Wis. Stat. sec. 943.30.
- What if they had two mortgages, and they were already underwater with just the first mortgage?
- What if their vehicles are older and worth next to nothing, but they still have huge balances on them? Or high interest rates?
- What if they have massive tax debts, child support obligations, or student loans?
- If there is no equity for which a second mortgage to attach to your house, we might be able to get rid of the second mortgage.
- We can cram-down vehicle loans so that you pay what the car is worth instead of the actual balance. We might also be able to reduce your interest rates on the auto loan.
- While taxes, child support, and student loans cannot be discharged in bankruptcy, they can be handled in Chapter 13 bankruptcy, which means you will exit bankruptcy with less debt, and while paying 0% interest on many of these debts.