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I Am A Secured Creditor – How Long Will I Wait To Get Paid By A Borrower Who Just Declared Chapter 13 Bankruptcy?

Creditor-Side Bankruptcy

Chapter 13 bankruptcy is often thought of as the bankruptcy relief that offers the debtor some “breathing room” from his creditors.

The Chapter 13 debtor is one who should have some steady income and be able to pay off his debts over time.

Knowing this, how soon a creditor can expect to receive payments from a Chapter 13 debtor depends on (1) the provisions of the debtor’s Chapter 13 plan, (2) whether the debtor elects to make payments to secured creditors outside the plan, and (3) how long it takes the Court to confirm the debtor’s plan.

It sounds simple enough: the debtor continues to make regular payments to his or her creditors, but has additional time (3-5 years) to make payments on the old debt he or she accumulated before filing for bankruptcy (pre-petition arrearages).

The debtor can make 2 kinds of payments to creditors—the pre-petition payments under a plan via the Chapter 13 Trustee and direct post-petition payments to secured lenders (who are usually mortgage or trust deed holders).

In order to accomplish this “catch-up” feat, a chapter 13 debtor is required by the Federal Rules of Bankruptcy Procedure §3015 to file a Plan within 15 days of his bankruptcy petition. The plan should provide for the debtor to make regular payments to the bankruptcy Trustee, who will in turn disburse the funds according to priority (established by bankruptcy law) and according to the plan.

The Chapter 13 plan does not have to pay off 100% of the debt; in fact it can account for pennies on the dollar to unsecured creditors. If a debtor elects to make payments to his secured creditors “outside the plan” he will make his regular monthly payments to the secured creditor and use the Trustee to pay the pre-petition arrearages.

If he is able to do this, a secured creditor will have few delays getting paid by the debtor, at least when it comes to regular monthly payments. Sometimes, debtors use the plan to “cramdown” the interest rates paid even to secured creditors, which requires the creditors to object to the plan.

If, however, there is enough equity in the debtor’s property to “adequately protect” the secured creditor, the judge may not require the debtor to make payments to secured creditors. (This is when a secured creditor should consider filing a Motion for Relief from Stay or a Motion for Adequate Protection in order to receive some judicially ordered payments from the debtor.)

As for the pre-petition arrearages, the Trustee will not disburse the funds absent a confirmed plan. Each creditor should have been served with a notice of the bankruptcy filing, and has the opportunity to review and object to the plan prior to the plan confirmation. The court must hold a plan confirmation hearing within 45 days, but it doesn’t need to confirm the plan by then. 11 USC §1324, 1325

The judge has the discretion to continually postpone the confirmation hearings indefinitely or to dismiss the case. Even if you as a creditor consent to the terms of the Chapter 13 plan, other creditors can delay the confirmation if they object to the plan terms. Once the plan is confirmed, the debtor is obligated to make plan payments for their pre-petition debt.

You can see that a debtor who has a lot of equity in his property but who is unable to pay his secured creditors can have a lot of time before he will be required to make post-petition payments to secured creditors under a Chapter 13 bankruptcy filing.

If you have questions about creditor rights in a bankruptcy proceeding, call our office at 650-327-2900 to set up an appointment so we can evaluate your legal options.

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