Creditors' Claims under the Chapter 13 Plan -

     Under the Chapter 13 Plan, Creditors claims are sorted into 3 categories: unsecured priority, secured, and unsecured non-priority. Each one is treated differently by operation of law.

Priority Claims

     Priority claims receive exalted status under the Bankruptcy Code, as they are required to be paid in full through the plan (although generally without interest). There are 10 different types of priority claims. They are described in Section 507 of the Bankruptcy Code. They include: domestic support obligations; administrative expenses, including the fees of the trustee, and the attorney's fees of debtor's attorney; unpaid wages, salaries, commissions, and contributions to employee benefit plans, earned within 180 days of the petition filing or cessation of debtor's business, whichever first occurs, with a ceiling of $ 10,950; consumer deposits, with a cap of $ 2,425.00; recent taxes (usually less than 3 years old); claims based on debtor's commitment to a federal depository institution regulatory agency to maintain the capital of an insured depository institution; and, finally, claims based on debtor's operation of a motor vehicle while under the influence of alcohol or drugs. Congress periodically adds to the list of priority claims, depending on their views on entitlement to this elevated status.

Secured Claims

     Secured claims are claims where the creditor has received some type of collateral prior to the bankruptcy case, the most common being mortgage or trust deed payments and car loans. Generally, the creditor gets to keep his collateral and the debtor is required to pay back to that creditor, with interest, an amount at least equal to the value of the collateral, i.e., the house or the car. If the debt was incurred within certain time-frames prior to the filing, i.e., 910 days, then as to personal property, the debtor is required to pay back the entire amount, not just the value of the collateral. Also, Section 1322(b)(2) provides that, if the loan is secured solely by the debtor's residence, then the debt cannot be modified--the debtor cannot "strip down" the loan to the home's current fair market value, but rather must pay according to the terms of the note. The plan can, however, allow a debtor to make up past due amounts over the term of the plan.

Unsecured Non-priority Claims

     Unsecured non-priority claims are the typical claim, and include most credit card debt, and other contract claims. They are distinguished by the fact that they did not receive any particular property from the debtor as collateral for repayment of the debt. These claims are usually on the low-end of the totem pole as far as receiving money back in a Chapter 13 case. It is not unusual for creditors to receive only a nominal "dividend", between 0-10% of the claim, under Chapter 13. This amount is determined by two different "tests" found in Bankruptcy Code Section 1325: the debtor must pay into the plan his "projected" disposable income for the "applicable commitment period"; and, he must pay his unsecured creditors at least as much as those creditors would receive in a Chapter 7 liquidation (the "best interests of creditors" test).

Strategies for the Debtor

Automatic Stay, - Automatically stops most creditor action against the debtor "Lien-stripping" - Generally available in Chapters 11 and 13, "Use of "Avoiding Powers" - May let the debtor sue creditors and "undo" certain harmful transactions "Race to the Courthouse" - A bankruptcy filing allows assets to be sold by the debtor or trustee, over a reasonable period of time

Written by Henry Rendler