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Introduction: Creditors in Chapter 13 Bankruptcy
Chapter 13 bankruptcy is the best consolidation of debt you’ll ever get. It doesn’t require negotiation with the creditors holding your unsecured debt, can save your home from foreclosure, can help you repay your tax debt without interest or penalties and protects you from creditor collection activity for as long as 5 years.
Chapter 13 bankruptcy is a reorganization bankruptcy and not a liquidation bankruptcy in which debts are discharged in full without payment.
In a Chapter 13, your debts are prioritized for payment according to a payment plan that you draft with your attorney and file with the Bankruptcy Court.
You will propose in this Chapter 13 payment plan to pay X amount per month, every month, for 3-5 years to the Chapter 13 Trustee assigned to your case by the court. It will then propose that the Trustee will take those funds and disburse payment, in full or in part, in a priority order mandated by the Bankruptcy Code and Bankruptcy Rules.
This priority order largely follows an order of classification of debt, from secured to unsecured, to so-called priority to non-priority.
Which debts fall into the different levels of this classification scheme is outside the scope of this article, but let’s thumb-tack a few notable types for reference purposes:
- Mortgage debts for a home you wish to retain are secured debts.
- A child support obligation is a priority unsecured debt.
- A credit card debt is non-priority unsecured debt.
- Your bankruptcy attorney’s and the Chapter 13 Trustee’s fees are priority “administrative expenses” in a Chapter 13 plan.
This being the case, a reorganization of debt is only fully successful if it accounts for and includes—all of the debt.
What happens if you forget about a debt? Or what happens if a creditor you didn’t know existed turns up after you’ve already filed your Chapter 13 bankruptcy case?
Newly Discovered Creditors in Chapter 13 Bankruptcy Cases
The effect of an unlisted (“unscheduled”) creditor in a Chapter 13 bankruptcy case will differ depending upon the class of the debt.
For example, a priority unsecured child support debt is not only not dischargeable in any form of personal bankruptcy, it is also unaffected by the automatic stay that stops most debt collection activity when a Chapter 7 or Chapter 13 bankruptcy case is filed.
On the other hand, if you forget to schedule your mortgage servicer and the purpose of the Chapter 13 bankruptcy is to save your home from foreclosure—well, that’s a pretty big slip-up. (Hire a new bankruptcy attorney!)
What about unsecured creditors?
In a Chapter 7 bankruptcy, a non-priority unsecured creditor who is accidentally not scheduled in or noticed of the bankruptcy petition is still discharged entirely along with the rest of the unsecured debt—so long as the error was not committed in “bad faith.” (We won’t discuss what that means in this article, but you can probably take a good guess as to the definition.)
In a Chapter 13 bankruptcy, an unsecured creditor who is not scheduled in or notified of the filing of the bankruptcy case is not discharged at all.
Such a creditor will receive no payment from the Chapter 13 Trustee (who, at the very least, needs a dollar-figure debt amount and an address to which to mail a check).
Such a creditor will be entitled to resume collections activity the moment your Chapter 13 bankruptcy case is closed by the court after discharge.
In other words, in a Chapter 13, it’s extremely important that do your homework prior to filing, gather all of the information that your bankruptcy attorney requests from you, and that you provide your attorney will all of that information (neatly!), including the names and addresses and amounts owing to every single creditor you have.
Even your grandmother. Even if there is no paper involved in the loan and the resulting debt.
But what if all of your due diligence fails to turn one creditor up? Or what if that old debt you totally forgot about turns up by way of a collection demand or state court lawsuit after you file your Chapter 13?
What to Do When a Creditor Is Not Scheduled in a Chapter 13 Case
If, for whatever reason, you do neglect to list or omit a creditor or debt from your Chapter 13 case, the first thing you should do when you discover the error is to inform your Michigan bankruptcy attorney.
Certain steps will now need to be taken, and they simply will not be taken if you try to engage in communication or negotiation yourself, directly with the creditor.
The creditor will take whatever steps in its collection efforts that it can get away with. Only your bankruptcy attorney will properly and firmly clamp down on their activity.
Time is of the essence, however. If you wait until the last month of your Chapter 13 process and only then complain to your attorney about the undisclosed creditor, your options will be limited!
If your Chapter 13 case has already discharged or closed, you are out of luck. You owe the creditor or will need to litigate the question of the legality of the debt in state court—probably defensively when the creditor sues you for a money judgment.
If, however, your case is still open and you quickly communicate the issue to your lawyer (who will not be angry, honest!), the following steps will be taken.
Your bankruptcy lawyer will notify the creditor in writing of the existence of the bankruptcy case, provide a copy of the Notice of Commencement issued by the Bankruptcy Court upon filing. That notification will be accompanied by a demand for a cessation of all collections activity with (usually) a threat of the filing of a Motion for Contempt and Sanctions in Federal Court.
If the creditor doesn’t cease and desist, your attorney may want to issue one or two more demands for cessation depending on the identity of the Bankruptcy Judge attached to the case, but, ultimately, lack of capitulation by the creditor will result in a Motion for Contempt and Sanctions. That is, a motion for money damages in Bankruptcy Court.
Meanwhile, you will need to work with your bankruptcy attorney to amend the Bankruptcy Petition Schedules in which you have listed your debt and creditors to now include the omitted creditor.
Depending upon the amount of money involved and the value of your assets and other factors feeding into the question of how much the monthly Chapter 13 Plan payment is required to be, your Chapter 13 Plan may also need to be amended to accommodate the increase the amount of debt in the plan.
Once the creditor has ceased its collection activity and the debt has been properly scheduled, the final step is to ensure that the creditor who was not timely noticed of the case filing has the opportunity to receive disbursements from the Chapter 13 Trustee.
Note that you are not doing this because you care if an unsecured, non-priority creditor gets paid or not once you have ensured that the debt will be discharged. You are doing it to ensure that, post-bankruptcy, the creditor has no argument remaining that its debt was not discharged.
Creditors will be paid by the Chapter 13 Trustee only if they file a form called a proof of claim with documentation attached evidencing their ownership of the debt and entitlement to be paid for the debt.
Proofs of claim must be filed a court-ordered deadline date.
If you have discovered the error prior to that deadline date (optimally), your attorney will communicate with the creditor in attempt to educate it as to its right and need to file a proof of claim by that date. An agreement to extend that deadline as to that creditor (only) may be negotiated, depending on the timing and other circumstances involved.
Or the creditor will be merely notified of the deadline, leaving the responsibility to follow up to the creditor.
Again, unsecured non-priority creditors who are properly (timely) noticed of a Chapter 13 and who, on their own volition, fail to file a proof of claim are discharged entirely without payment.
It’s the creditor’s problem, in other words.
If the error is discovered post-deadline (less optimally), a three-way negotiation will need to occur between yourself, the creditor, and the Chapter 13 Trustee to obtain a court order allowing the creditor to file a proof of claim after the deadline for doing so.
This is not hard to obtain—but it will take extra work from your attorney (and more attorney fees billed through your Chapter 13 plan as a result).
It will also depend upon a creditor with uncertain levels of attentiveness, bankruptcy familiarity, legal representation, and general professionalism.
It can, in other words, quickly become a “you can bring a horse to water, but you can’t make him drink” situation.
Unscheduled Creditors in Chapter 13 Bankruptcy: The Bottom Line
The bottom line is that mistakes happen. And that old debt has a way of resurfacing long after you have forgotten about it when the underlying note is sold to a debt buyer or collection responsibilities are transferred.
It doesn’t in any way mean that you screwed up or need to be embarrassed about discussing it with your bankruptcy lawyer.
Attorney Walter Metzen has represented thousands of consumers in Chapter 7 and Chapter 13 bankruptcy cases in Michigan.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing a Chapter 7 or Chapter 13 bankruptcy in Michigan.
