Attention Secured Creditors: The Deadline to File a Proof of Claim Applies to You Too!

In May 2015, the Seventh Circuit came down with decision that is contrary to what has been a common practice among creditors for years. Typically, when a debtor files a Chapter 13 bankruptcy, all creditors receive a notice to file a proof of claim. There is a claim bar date on that notice and the failure to timely file a proof of claim results in your claim being disallowed. If your claim is disallowed and the debtor completes his or her Chapter 13 plan, the debt owed will be discharged even though the creditor received nothing under the Chapter 13 Plan. Historically, only unsecured creditors have been required to comply with the deadline to file a proof of claim in a bankruptcy proceeding. However, the Court recently held that the deadline for filing proof of claims applies to all creditors, including secured creditors.

What is the practical effect of this decision for secured creditors who fail to timely file a proof of claim? First, rest assured that although the debt may not survive a bankruptcy, the lien still does. So you may not be able to collect for the monies owed but you are still entitled to repossess the collateral post-bankruptcy. Second, this will be equally problematic for debtors whose secured creditors fail to file a proof of claim. For example, if a debtor files Chapter 13 to stop a foreclosure and pay the mortgage arrears through the Chapter 13 plan and the mortgage holder does not file a proof of claim, the funds paying into the plan for those mortgage arrears will be distributed to unsecured creditors who might otherwise get nothing! This will be an issue in the Western District of Wisconsin because Chapter 13 Plans are often confirmed before the claims bar date even passes. So creditors and debtors alike- BEWARE!!!!

For more information on this topic or to schedule a consultation with one of Bosshard Parke Ltd.’s experienced bankruptcy attorneys, please contact us now.