Priority Creditor Proofs of Claim in Chapter 13

 Posted on November 21, 2016 in Chapter 13

Priority proofs of claim need to be carefully monitored in a Chapter 13 case. Make sure one’s filed so it gets paid, and at the right amount.

Priority Debts and Chapter 13

One major reason you’d file a Chapter 13 “adjustment of debts” case is if you have “priority” debts. These are special debts that generally can’t be discharged—legally written off—under Chapter 7 “straight bankruptcy.” So they must be paid.

The main priority debts consumers tend to owe are:

• unpaid child and spousal support (Section 507(a)(1) of the U.S. Bankruptcy Code)
• income taxes meeting certain conditions (Section 507(a)(8))
• claims for personal injuries from driving while intoxicated (Section 507(a)(10))

Chapter 13 is often better than Chapter 7 for dealing with substantial priority debts because it can shield you much better from those debts, as you pay them on your own terms. A Chapter 7 cases usually last about four months, shielding you from priority debts only during that short time. In fact Chapter 7 does not protect you at all from collection of current or back child and spousal support.

In contrast, a Chapter 13 case lasts three to five years. You have that much more time to pay the priority debts, and usually the creditors can’t collect throughout that time.

Proofs of Claim of Priority Debts

Your creditors file “proofs of claim” in your bankruptcy case to assert how much you owe them. A creditor doesn’t get paid under your court-approved payment plan if it doesn’t file one. But if it doesn’t and you want it paid, you or the Chapter 13 trustee can file one for them. Section 501(c).

You generally want priority debts to be paid. Assuming so, your Chapter 13 payment plan would earmark funds to pay them. So you or your bankruptcy lawyer needs to monitor whether the creditors do file proofs of claim, and file one on behalf of any that neglect to do so.

Unexpectedly Large or Small Proofs of Claim

The priority creditors’ proofs of claim also need to be monitored to see if the amount of debt is accurate. The amounts need to match or be quite close to the amounts used in calculating your Chapter 13 plan.

If a priority proof of claim is significantly larger than expected, your case may take longer to finish than planned. But there’s a limit: a Chapter 13 case is generally not allowed to take longer than 5 years. So you may have to increase your monthly plan payments to complete it on time. Or your lawyer may be able to “modify” (amend) your plan to reduce what you are paying to other creditors to make up for the increase in a priority proof of claim.

Similarly, if a priority proof of claim is lower than expected your case may be done faster. But usually you must pay all of your disposable income into the plan for a certain period of time. That’s usually either three or five years, depending on your income at filing. If that’s true in your case, money that had been earmarked for that priority debt would usually just go to other creditors.