Claims Bar Date Applies to Secured Creditors

The U.S. Court of Appeals for the Seventh Circuit recently held that the 90-day claims bar deadline in Federal Rule of Bankruptcy Procedure 3002(c) applies to the claims of all creditors, including those of secured creditors, who want to participate in a debtor’s Chapter 13 bankruptcy.

The debtor filed a Chapter 13 bankruptcy case, and one of his creditors, a bank with two claims against the debtor—a secured claim for a first mortgage on commercial property and an unsecured claim for a deficiency judgment resulting from a state foreclosure proceeding on residential property—filed a proof of claim more than three months after the claims bar deadline under Rule 3002(c) had passed. The bank argued that the deadline in Rule 3002(c) did not apply to secured claims and that a secured creditor may file a proof of claim at any time before confirmation. The bankruptcy court agreed.

Creditor Must File to Participate in Plan Payments

Secured creditors are not strictly required to file proofs of claim in Chapter 13 cases, although a proof of claim must be filed if the creditor wants to participate in plan payments because only claims that are filed, and, therefore allowed, are entitled to receive a distribution under a confirmed plan. However, whether the 90-day claims bar date applies to a proof of claim filed by a secured creditor is subject to debate.

Bankruptcy courts have come to conflicting conclusions regarding the application of Rule 3002 to secured creditors because subsection (a) of Rule 3002, which requires the filing of a proof of claim, applies specifically to unsecured creditors; secured creditors are not mentioned in that subsection. Some bankruptcy courts find the omission of secured creditors from subsection (a) to mean that Rule 3002 as a whole applies only to unsecured creditors.

All Claims Subject to Bar Date

Subsection (a) is limited to unsecured creditors but that does not mean that subsection (c), which establishes the 90-day deadline, also is limited to unsecured creditors. The Seventh Circuit observed that the omission of secured creditors from subsection (a) makes sense because a creditor must file a claim to participate in a Chapter 13 bankruptcy, and the consequences of not filing a proof of claim are different for unsecured and secured creditors. An unsecured creditor who does not file a proof of claim will not share in plan payments, and its claim will be discharged. A secured creditor who chooses not to participate may enforce its lien even after the debtor’s discharge. Subsection (a) only determines who must file a proof of claim to collect a debt, and a secured creditor does not have to file a claim to collect its debt because its lien will survive bankruptcy.

Subsection (c) does not distinguish between the claims of secured and unsecured creditors. If a secured creditor chooses to participate in the debtor’s bankruptcy by filing a proof of claim, it is bound by the 90-day deadline. As the court of appeals noted, subsection (c) applies to any “proof of claim” and a “claim” is broadly defined by the Bankruptcy Code as a “right to payment…secured or unsecured.” In addition, although Rule 3002 refers in different places to both “claim[s]” and “unsecured claim[s],” it does not mention unsecured creditors when setting the 90-day deadline.

The court also noted that “sound judicial administration” supported its holding. Allowing creditors to file untimely claims could upend a carefully crafted repayment schedule, lead to disruptive delays in plan confirmation hearings, and hinder the bankruptcy court’s ability to manage its docket. Finally, the court noted that the U.S. Judicial Conference Advisory Committee has recommended an amendment to Rule 3002(a) intended to make clear that both secured and unsecured creditors must file a proof of claim in order for their claims to be allowed. This should remove any doubts that the claims bar date applies to all creditors. If approved, the rule as amended will become effective on December 1, 2016.

In re Pajian, 785 F.3d 1161 (7th Cir. 2015)

About the Author:

George Basharis, JD

George Basharis, J.D. is a practicing bankruptcy attorney in the Northern District of Illinois. He has represented dozens of individuals and small businesses in federal bankruptcy proceedings and related matters. George also advises the CINgroup on a variety of aspects regarding bankruptcy law. He has authored books, white papers, customer newsletters and conducted speaking engagements regarding bankruptcy.