Cite as: Keith M. Lundin, Lundin On Chapter 13, § 127.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
Chapter 13 debtors often file motions to modify the plan to “add” prepetition creditors that were omitted in the schedules.1
There is no such thing as “adding” a prepetition creditor to the confirmed plan. If the debtor omitted scheduling a creditor and the omission is realized after confirmation, the creditor or the debtor on behalf of the creditor,2 can simply file a proof of claim. Alternatively, the debtor can file an amendment to the list of creditors3 to add the omitted creditor—a process that requires no court action. The creditor is then sent notice, and the creditor or the debtor can file a proof of claim. Absent objection, the claim will be allowed and paid along with other claims in the same class. As explained by the Bankruptcy Court for the Western District of Michigan, when the unscheduled creditor falls in a class that is provided for by the confirmed plan, the issue is not postconfirmation modification to “add” the creditor, the issue is claims allowance:
[A]n omitted creditor in an already confirmed plan may still be able to be included in the plan (i.e., receive a distribution and be subject to the Section 1328 discharge) by doing nothing more than filing a late proof of claim. . . . Of course, any party in interest may object . . . . An objection by either the Chapter 13 trustee or an existing creditor would always block an omitted creditor’s attempt to be “added” to a plan through the filing of a late proof of claim. . . . [T]here is also the possibility that the omitted creditor could still be brought within the [confirmed plan] through the allowance of a protective claim filed by the Debtor. . . . Fed. R. Bankr. P. 3004. . . . Rule 9006(b) permits enlargement of [the time period in Bankruptcy Rule 3004]. . . . A debtor who wishes to include the claim of an omitted creditor through the allowance of a late filed protective claim would begin by filing a motion to enlarge the time period to file the protective claim. . . . [P]arties-in-interest could object to the motion . . . . [T]he debtor would have to establish at a minimum that the omission of the creditor was excusable. If the debtor could meet this threshold, then the burden would shift to the creditor to establish that it would be prejudiced by its late inclusion into the plan. . . . In contrast to the current practice of modifying plans to add creditors, these procedures are not only consistent with the Bankruptcy Code and its accompanying rules, but those procedures also provide a better conceptual framework to weigh the competing interests of the debtor, the existing creditors and the omitted creditor.4
Neither of the described procedures requires modification of the plan, unless dealing with the additional creditor necessitates a change in the plan—for example, an increase in the amount the debtor pays into the plan to accommodate the additional creditor or a change in the payment of claims to reflect additional debt. If scheduling the omitted creditor changes the plan, then the debtor must modify the confirmed plan and comply with § 1329.5
Objections to added prepetition claims are rare. The debtor is the party most interested in objecting to claims, and typically it is the debtor filing the claim on behalf of the omitted creditor or noticing the creditor to prompt the creditor to file a proof of claim. The Chapter 13 trustee is unlikely to object if allowance of the claim will not materially disrupt the amount or timing of distributions under the plan. Other claim holders have little ground for objection if allowance of the omitted claim will not change their treatment under the plan.
If allowance of the omitted claim will materially affect creditors—for example, if the claim is of such a size that its addition will substantially extend the plan or make it impossible to pay unsecured claims as provided by the confirmed plan—then the debtor must do two things: (1) give notice to the omitted creditor to permit filing of a proof of claim (or the debtor may file a proof of claim for the omitted creditor) and (2) modify the plan to accommodate the omitted creditor. Other claim holders or the trustee may then object to the proposed modification and object to allowance of the added claim.
Modifying a plan after confirmation to deal with an unscheduled creditor is problematic if the bar date for the filing of proofs of claim has passed under Bankruptcy Rule 30026 and the deadline has expired for the debtor to file a proof of claim on behalf of the creditor under Bankruptcy Rule 3004.7 As discussed elsewhere,8 the allowance, payment and discharge of untimely claims in Chapter 13 cases is difficult territory. The debtor might begin with a motion under Bankruptcy Rule 9006(b) to enlarge the time for the debtor to file a proof of claim on behalf of the unscheduled creditor under Bankruptcy Rule 3004.9 If the omitted creditor would fall within a class of claims already provided for by the confirmed plan and if allowance of the omitted creditor’s claim would not materially impact other provisions of the plan, then modification under § 1329 would not be necessary.
If allowance of the unscheduled claim will materially affect the rights of creditors under the confirmed plan, the debtor may have to modify the plan in addition to filing a claim on behalf of the creditor. Focus then shifts to whether there are objections to the modified plan. When no one objects, the debtor controls how an unscheduled creditor is paid through the plan. The plan might be modified to pay the unscheduled claim the same as timely filed scheduled creditors. If the claims bar date has passed, the modified plan might provide that the previously unscheduled creditor has some specified opportunity in which to file a claim. In the absence of objection, such a modified plan permits the new creditor to file an allowable claim and to participate in distributions. Modification to pay the omitted creditor after payments to other creditors or from income received by the debtor more than three years after confirmation is perhaps less likely to provoke objections to modification. One court allowed a (preconfirmation) plan modification for the debtor to pay an omitted creditor directly.10
One reported decision found unorthodox logic to support modification of a plan to provide for an unscheduled creditor after the claims bar date. In In re Rodriguez,11 the plan confirmed in 1995 provided 22 percent for a class of unsecured creditors listed by name. A creditor named Solis with a disputed, unliquidated claim was not listed in the schedules or in the plan. In 1998, the debtor filed a motion to “add” Solis’s claim. The bankruptcy court overruled Solis’s objection, reasoning that the proposed modification was permissible because not prohibited by any test for modification:
Bankruptcy Code § 1329(a) does not specifically allow the addition of a neglected creditor . . . . [N]either is there any authority holding that the modification is not permissible. . . . Bankruptcy Code § 1326(c) provides that the chapter 13 trustee “shall make payments to creditors under the plan.” The statute does not limit payments to creditors who timely file proofs of claim and does not limit claims to “allowed” claims. Bankruptcy Code § 1328(b)(8) states that a chapter 13 plan may provide for payments of claims against the Debtor. It does not limit the payment to allowed claims. . . . [T]here does not appear to be any statutory preclusion of a plan provision for the payment of a claim for which a proof of claim was not timely filed. . . . [I]f modification is permissible, the chapter 13 trustee would be required to pay the claim of the additional unsecured creditor (§ 1326(c)). The claim would then be “provided for” by the plan and discharged (§ 1328(a)) if all payments under the plan are made. . . . There would be no reason to require dismissal and a new bankruptcy filing to achieve the same result as might be achieved merely by plan modification. . . . . [T]he new creditor will have the opportunity to object that confirmation of the plan does not meet the best interest of creditors, or liquidation, test, or any other requirement for plan confirmation.12
In reaching this conclusion, the Rodriguez court noted that the unlisted creditor could not file a timely proof of claim, but also any claim the unlisted creditor might file could not be disallowed for untimeliness because of “inequity and unconstitutionality.” Also, unless the plan was modified, the unlisted claim would not be discharged because it was “not provided for” in the confirmed plan and could not be disallowed under § 502.13 Modification of a confirmed plan to pay an omitted creditor that cannot file an otherwise allowable claim is a practical solution to a problem that is not well managed by the Bankruptcy Code.14
Rodriguez recognizes that most debtors have the option to convert to Chapter 7 rather than modify the plan, and in the Chapter 7 case even the creditor omitted in the original schedules would be dischargeable.15 If the debtor dismissed the Chapter 13 case and refiled, the debtor could deal with all creditors, including the omitted creditor.16 Precluding the debtor from dealing with an unscheduled creditor by modification of the plan forces the debtor to consider conversion or refiling—strategies that are not likely to produce more favorable outcomes for creditors.
3 See § 41.3 [ Preconfirmation Amendment of Petition, Statements, Schedules and Lists ] § 41.2 Preconfirmation Amendment of Petition, Statements, Schedules and Lists.
4 In re Moore, 247 B.R. 677, 686–89 (Bankr. W.D. Mich. 2000).
5 See In re Goodwin, 183 B.R. 329 (Bankr. S.D. Ga. 1995) (Debtor cannot allow a late-filed proof of claim by agreement with a creditor where the debtor is not willing to increase payments into the plan to maintain the original dividend for unsecured claim holders. The debtor’s agreement with the late-filing creditor is a modification that cannot be accomplished after confirmation without complying with the provisions of the Code and Rules for postconfirmation modification.); In re Weissman, 126 B.R. 889 (Bankr. N.D. Ill. 1991) (Debtor’s motion to add a debt and to allow a late claim is a motion to modify a confirmed plan to subject an unscheduled claim holder to the 10% payment in the confirmed plan. Section 1329 prohibits modification because debtor has not demonstrated unanticipated changed circumstances, nor can debtor modify a confirmed plan with respect to an individual creditor to whom no plan provision applies.).
6 See § 275.2 [ In General: Filing is Required for Allowance ] § 132.2 In General: Filing is Required for Allowance.
8 See § 133.2 Unscheduled Creditors before BAPCPA, § 133.3 Unscheduled Creditors after BAPCPA, § 135.6 Untimely Filed Claims in Cases Filed before October 22, 1994: The Hausladen Phenomenon and § 135.7 Untimely Filed Claims in Cases Filed after October 22, 1994.
9 See, e.g., In re Moore, 247 B.R. 677, 687–88 (Bankr. W.D. Mich. 2000) (“[T]here is also the possibility that the omitted creditor could still be brought within the [confirmed plans] through the allowance of a protective claim filed by the Debtor. . . . Fed. R. Bankr. P. 3004. . . . Rule 9006(b) permits enlargement of [the time period in Bankruptcy Rule 3004]. . . . A debtor who wishes to include the claim of an omitted creditor through the allowance of a late filed protective claim would begin by filing a motion to enlarge the time period to file the protective claim.”).
10 In re Hartdegen, 67 B.R. 230 (Bankr. N.D. Ala. 1986) (Debtor is permitted to modify plan prior to confirmation to provide for direct payment of an unsecured claim where debtor omitted claim in original schedules and amended to overcome good-faith objection to confirmation.).
11 225 B.R. 628 (Bankr. S.D. Tex. 1998).
12 225 B.R. at 633–34.
13 See § 349.1 [ Claims Not Provided for by the Plan or Disallowed under § 502 ] § 158.5 Claims Not Provided for by the Plan or Disallowed under § 502.
14 See also § 133.2 Unscheduled Creditors before BAPCPA, § 133.3 Unscheduled Creditors after BAPCPA, § 134.3 Strategic Considerations: When to File Claims for Creditors, § 135.6 Untimely Filed Claims in Cases Filed before October 22, 1994: The Hausladen Phenomenon and § 135.7 Untimely Filed Claims in Cases Filed after October 22, 1994.
15 See 11 U.S.C. § 348, discussed in § 142.1 New Schedules, Statement, Meeting of Creditors and Deadlines, § 142.2 Deadlines and Filing Requirements at Conversion after BAPCPA, § 142.4 Notice Issues under § 342 at Conversion and § 142.5 On Postpetition Claims.
16 See Atlantic Fin. Fed. v. Frost (In re Frost), 123 B.R. 254, 259 (S.D. Ohio 1990) (It is “pointless to interpret § 1329(a)(1) as denying . . . a modification motion when the debtor can achieve the same result through dismissing and refiling.”).