Category Archives: unsecured creditor

DO I HAVE TO LIST ALL OF MY CREDITORS IN BANKRUPTCY?

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Debtors often ask me not to include a specific debt in their bankruptcy.  In most cases the motivation behind these requests is that the debtors wish to keep a house or a car and they believe that if the debts that are secured by their property are listed in the schedules, they will lose the property.  That belief is inaccurate.  The following is a general rule for listing creditors in bankruptcy schedules.

Debtors are required to list all of their creditors in their schedules when they file bankruptcy.  Being listed in bankruptcy schedules affects creditors differently depending on the type of debt.  Secured creditors have to be listed in the schedules but the debts don’t necessarily have to be discharged.  For example, a debtor who has a car payment must list the debt in her schedules but can choose to reaffirm the debt so that it will not be discharged in the bankruptcy.  Priority debts, such as child support or income tax liability, must be listed in the schedules, but these debts are generally nondischargable, meaning the debtor will still be liable for the debt after the bankruptcy case is closed.  Unsecured debts, with the exception of student loans, are almost always subject to full or partial discharge in bankruptcy.  Debtors cannot choose to reaffirm these debts.  Making payments to one unsecured creditor in preference to other unsecured creditors is not permitted and can result in the money being seized by the trustee.  As you can see, just because a debt is listed in bankruptcy schedules, it doesn’t necessarily mean that the debt or the property will be affected by the bankruptcy case.

STUDENT LOANS -YOU MAY WANT TO PAY IN YOUR BANKRUPTCY CASE

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Student loans are a peculiar sort of debt in the context of a Chapter 13 bankruptcy case.  They are unsecured which entitles them to low priority for repayment in Chapter 13 plans, yet they are nondischargable, meaning the student loan debt survives the bankruptcy discharge.  Because of these two traits, it is very important to pay special attention to student loan debt in Chapter 13 plans.

 

To understand why, we need to consider how unsecured claims are paid in Chapter 13 plans.  In Chapter 13 bankruptcy cases, unsecured creditors aren’t always entitled to receive payment.  If and how much an unsecured creditor will be paid depends on the disposable income available to the debtors.  Unsecured creditors do not automatically receive payment in Chapter 13 bankruptcy.  Rule 3002 of the Federal Rules of Bankruptcy Procedure states that in order to receive payment, creditors have to file a proof of claim, which basically is documentation proving what they are owed and why.  If the creditor doesn’t file a proof of claim, they don’t get paid.

 

In my experience, student loan creditors are especially lazy about filing proof of their claim.  Their claims are nondischargeable, so even if they don’t file a proof of claim they will get paid eventually.  However, whether or not a student loan creditor files a proof of claim can be very significant to a debtor.  Let me give you an example.  John owes $100,000 in unsecured debt.  $40,000 of that debt is student loan debt.  Based upon his disposable income, he potentially will have to pay back $60,000 (60% of the total) to his unsecured creditors in his Chapter 13 plan, depending on how many of them file proof of claim.  If all of his creditors file proof of claims, he will pay back 60% of his total unsecured debt.  The student loans will be paid back 60% ($24,000) of their claim in the plan, and the remaining creditors will be paid back 60% ($36,000) of their claims, for a total of $60,000.  After his bankruptcy he will still owe $16,000 of student loan debt (the amount of student loan debt not paid in the bankruptcy) because this debt is nondischargable, but the remaining $24,000 of other unsecured claims will be discharged, meaning John will not have to pay back those debts.  John’s total payments to his creditors will be $60,000 in the bankruptcy case and $16,000 afterwards, for a total of $76,000.

 

But look what happens if the student loan creditors don’t file a proof of claim.  The student loan creditors will receive nothing, but the other unsecured creditors are paid in full, meaning that John will have paid $60,000 in the bankruptcy case to his unsecured creditors, and still owe $40,000 to the student loan creditor after bankruptcy, for a total of $100,000.  So, how can we make student loan creditors file a proof of claim?  We can’t.  But Rule 3004 of the Federal Rules of Bankruptcy Procedure allows debtors to file a proof of claim on behalf of creditors when they fail to do so.  So as you can see, attorneys should pay special attention to student loan debt in Chapter 13 plans.