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Creditor’s Rights - Protecting the Chapter 13 Creditor (Part 1 of 2)

A) Secured creditor

Lien protection . Secured creditors are protected by the value of their interest in the debtor’s collateral, and the plan must provide for payment of the secured portion of the creditor’s claim, plus interest on value of the secured claim during the duration of plan. Secured creditors in Chapter 13 cases are usually going to be the mortgage holder on the debtor’s real property and the creditor’s remedy is going to depend on what stage the Chapter 13 case happens to be at. Upon commencement of a case, the creditor should promptly file a proof of claim and a request for notice.

Post-petition delinquency . In the period of time immediately after the commencement of the case but prior to confirmation of the plan, if the debtor has defaulted in making mortgage payments the secured creditor might bring a motion for relief from the automatic stay, although it is usually more productive to simply file an objection to the confirmation of the plan on the grounds that the debtor is now post-petition delinquent.

Monitoring the process. The courts in this district are not going to confirm a plan when the debtor is delinquent on mortgage payments post-petition. Such a case is usually dismissed at the time when the Meeting of Creditors is held. At the confirmation hearing the case is usually dismissed by the court if the post-petition mortgage payments or the Plan payment is delinquent. Sometimes it will be dismissed with prejudice where some egregious conduct has been committed by the debtor. Circumstances can be shown such as where there have been a series of repetitive Chapter 13 or other bankruptcy filings or where multiple bankruptcy cases concern the same real property such as multiple bankruptcies filed by co-owners or perhaps where fractional transfers of the property have occurred.

Remedy for post-petition default. After a plan is confirmed a secured creditor needs to monitor the debtor’s tender of the regular monthly mortgage payment and if a default occurs after confirmation, the creditor’s best remedy is to file a motion for relief from automatic stay. The courts in the 9 th Circuit make it very clear that the post-petition default of payments is a material breach of the debtor’s plan and constitutes “cause” under Bankruptcy Code Section 362(d) for relief from the automatic stay.

Proof of claim. All creditors should file a proof of claim. The bankruptcy code and the bankruptcy rules of procedure provide that most claims must be filed within 3 months after the debtor’s 341(a) meeting of creditors. A creditor that neglects to file a proof of claim should not expect to receive payment in the case.

The 9 th Circuit Court of Appeals in the case of Firemans Fund vs. Hobdy said that where a secured creditor neglects to file a proof of claim the debtor’s property is still encumbered by the lien. Even the arrearages that were provided for in the debtor’s plan do not go away just because the creditor overlooked or neglected to file a proof of claim and participate in the case. The lien securing all sums due, including the arrearages will survive the discharge.

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