By Ryan C. Wood
The filing and administration of a chapter 13 reorganization bankruptcy case can be extremely complicated even though the chapter 13 reorganization process is designed to be simplified as compared to a chapter 11 reorganization case. Different types of debts are treated differently in reorganization cases. There are secured, priority unsecured and general unsecured types of debts. The chapter 13 plan will provide how these different types of debts are treated. Certain creditors are entitled to full payment and others are not. So if the Chapter 13 trustee pays one creditor too much or pays the wrong creditor, the money is now gone and not available to pay the correct creditor, so what happens then?
Chapter 13 Reorganization Basics
Before moving forward and answering the question posed above there are some Chapter 13 reorganization basics that need to be discussed. The most basic explanation of Chapter 13 is that the bankruptcy filer has to pay back some of their debts for some reason. There are too many reasons to file Chapter 13 to discuss in this article. That means making a monthly chapter 13 plan payment to the chapter 13 trustee assigned to the case. A chapter 13 plan is normally three years or five years long. Once the chapter 13 plan is completed the amount of debt that does not have to be paid back is discharged. So the chapter 13 case is filed, chapter 13 plan payments are made to the chapter 13 trustee, chapter 13 trustee takes the payments and pays creditors according to the terms of the confirmed or approved chapter 13 plan of reorganization.
Once the chapter 13 case is filed creditors have a limited amount of time to file a proof of claim to provide evidence of the amount of debt owed to them at the time the case is filed. The chapter 13 trustee uses this
information to make payments to creditors.
There are two main distinguishing parts of Chapter 13 bankruptcy. First, to be eligible to file a Chapter 13 case you must have a way to fund a chapter 13 plan, not have secured debts that exceed $1,149,525.00 or unsecured debt that exceeds $383,175.00. If your debts exceed these limits you are not eligible to be a debtor under Chapter 13 and must reorganize under Chapter 11 instead. The debt limitations for Chapter 13 pursuant to Section 109(e) adjust every three years and the next adjustment is scheduled for April 1, 2016. Second, creditors do not get to vote for or against the proposed chapter 13 plan of reorganization like in a chapter 11 case. Creditors in a Chapter 13 may objection to confirmation or approval of the plan, but they do not get to vote.
How A Chapter 13 Plan Works
A proposed chapter 13 plan must be filed with 14 days of the petition for relief being filed unless the court orders otherwise. The first month of the chapter 13 plan is the next month after the month the case was filed given the first chapter 13 plan payment is due 30 days after the case is filed. Even before the chapter 13 plan is confirmed or approved you must make plan payments.
As mentioned above different types of debts are treated differently pursuant to the Bankruptcy Code. There are priorities for creditors to get paid on the debts owed. The first amounts paid are administrative claims of professionals like the bankruptcy attorney. Next, creditors with secured debts are paid in full pursuant to the terms of the original agreement or in full given secured creditors have collateral securing payment of the debt. The next types of debts paid are creditors holding priority unsecured debts. An example of a priority unsecured debt is unpaid taxes or some sort of domestic support obligation. These debts and certain others have been determined by law to have a higher priority and should be paid next. The last group of creditors and those who get paid the least or whatever is leftover are the general unsecured creditors. It is common for general unsecured creditors to receive nothing after administrative, secured and priority debts are paid through the chapter 13 plan first.
So, What If Happens if a Chapter 13 Trustee Pays a Creditor Too Much or Pays the Wrong Creditor?
The answer to this question like many is it depends on your jurisdiction and the chapter 13 trustee involved. There is a cost benefit analysis to this issue as well. If a creditor is paid $100 by the chapter 13 trustee incorrectly it is only $100. Figuring out a way to make it right will not be too difficult. If the mistaken payment is $20,000 we now have a huge problem. One creditor received $20,000 and another creditor was supposed to get that money instead. Depending upon the time the error is discovered will matter also. If the error is discovered early on in the chapter 13 plan there is time to modify the plan and make things right. If the error is discovered towards the end of the chapter 13 plan, say the 57 month of the 60 month plan there is only 3 months left to try and make things right. If the mistake is a $20,000 mistake how is that made right when there are only 3 months of payments left? Fixing the plan could be impossible. Also, if the chapter 13 plan is not completed in 60 months the case could be dismissed pursuant to Section 1307(c)(6). In a recent Ninth Circuit Bankruptcy Appellate Panel memorandum of opinion, In re: Jose Noe Carmona, BAP No. CC-14-1380-TaPaKi, the Ninth Circuit BAP upheld the dismissal of the case for not completing the plan in 60 months. In the Carmona case there was an issue with the payment or nonpayment of a junior mortgage on Carmona’s house. The debtor’s bankruptcy attorney attempted to strip off the junior mortgage and change the status of the debt from secured to general unsecured. The debtor was not successful and the junior mortgage remained a secured debt. The chapter 13 plan was confirmed or approved and the debtor made payments up until the end of the plan. Towards the end of the plan the mistake was discovered and the chapter 13 trustee filed a motion to dismiss the case for failure to complete the plan in 60 months pursuant to Section 1307(c)(6). Without putting you to sleep with the technical details the bottom line is the mistake in Carmona’s chapter 13 plan was discovered too late to fix it. The Ninth Cir. BAP provides: “Put bluntly, because the Debtor never paid any amount on this claim and, instead, allowed payment to go entirely to other unsecured creditors, it was too late to salvage the Plan. The Junior Claim of over $137,000 dwarfed the other unsecured claims and required an unachievable redistribution of the Plan payments already made. Given the timing, Plan modification was impossible.”
In the Carmona case the court is clearly saying the debtor was at fault for not making sure creditors were getting paid correctly according to the terms of the confirmed chapter 13 plan. So what actually happens when the mistake is discovered depends upon who made the mistake. Generally, if the mistake is clearly the fault of the chapter 13 trustee, the chapter 13 trustee should make written demand upon the creditor to return the funds immediately. Who wants to turnover $20,000 while knowing you are not going to get that money back? No one does. So if the mistakenly paid funds are not voluntarily turned over then the chapter 13 trustee may have to obtain an order from the bankruptcy court. If the mistake is the debtor’s or their bankruptcy lawyer the same thing may take place but initiated by the debtor and their attorney. The moral of the story is to make sure creditors are filing claims and then make sure creditors are receiving what they are supposed according to the terms of the confirmed chapter 13 plan. If a mistake is caught late in the chapter 13 plan it may be too late to fix the problem.
